The setup for forcing a choice is very simple – offer three
choices. Two choices will be similar, but differ slightly in a key feature such
as quality or price, the third choice will usually be absolutely unwanted by
most of the customer base.
You are on the receiving end of this trick which, despite
being an old trick, has been verified by recent behavioural research in
economics.
Let’s use broadband pricing here in Australia as an
example. I have the data for the three
main internet service providers here, fresh off their websites today.
Telco’s A & B are the incumbents with the greatest
market share. Their pricing is telling us very clearly that the average customer
uses over 50 GB a month. So the plans for 30 or 50 GB are a non-choice for most
users, perhaps except for the over 50 year old demographic who tend to browse
the web and send emails, and perhaps Skyping, rather than downloading a lot of
music and movies or youtube clips.
You, as the average user are looking at a step up to 200 GB.
The savings per GB are great aren’t they. And, hey, look for only a few bucks
extra you can step up to 500 GB in Telco A and really save $/GB.
Telco B offers an unlimited bundle, which I haven’t listed
here, as they use some neural network based system to slow your connection down
if you exceed what they define as ‘average user downloads’, or if you are not
the typical user. In other words, their unlimited bundle is subject to what is
known as download speed shaping.
So, for Telco’s A & B, the average user is most likely to
sign up for the 200GB plan, with the lure of cheaper $/GB pricing luring some
to go onto the higher level plan. You have just been on the receiving end of a
game of ‘forcing the choice’.
Telco C is interesting. Their plans are clearly aimed at
being competitive and acquiring greater market share from the two major
incumbents. 100 GB is clearly attractive to many users, and the price is
reasonable compared to the other two telcos.
Now, we know from recent history that Telco C’s pricing has
forced the other two players to drop their pricing, which is great, but why
haven’t they price matched, and why haven’t they matched data plans. It is
simple, Telco C mostly sells the 100 & 300 GB bundles. The higher bundles
are attractive, but their network is suffering serious congestion (especially
in peak time since the introduction of Netflix a few months back), so the users
most likely to buy those services are unlikely to be able to use that extra
data. Given that it is only $10 a month
extra to go from 100 GB to 300 GB, you can bet that most new customers are
going to sign up for 300 GB – yet again succeeding in forcing the choice of
customers.
Let’s look at how this all affects the telco’s topline and
your costs.
For the sake of analysis, let’s assume that each telco
acquires 1000 new customers in a month.
Telco A selling one thousand 200 GB plans makes $93,000 a
month for 24 months. You as the customer using an average of only 100 GB a
month are paying $0.93 per GB.
Telco B selling one thousand 200 GB plans makes $80,000 a
month for 24 months. You as the customer using an average of only 100 GB a
month are paying $0.80 per GB.
Telco C selling one thousand 300 GB plans makes $70,000 a
month for 24 months. You as the customer using an average of only 100 GB a
month are paying $0.70 per GB.
So on price alone, a rational consumer would have to go for
Telco C. However, Telco A, which is the
largest player and ostensibly has the best network and associated
infrastructure and has the best overall brand image is deliberately pricing
above Telco B and C, so it, ironically, maintains market share and revenues. So, you are being played on force the choice
on two levels by Telco A.
The first level is that you will automatically be suspicious
of the unbelievably cheap pricing of Telco C, and they are relying on the
normal market share to be allocate between them and Telco B. That is, there are
always people willing to pay for their first tier brand and reputation for
reliability. Higher pricing is
traditionally used as a signal for higher quality in almost every market.
The second level is that when you do decide to go with them,
they use the forcing the choice pricing strategy to get you onto the 200 GB
plan.
I know which of these companies I would buy shares in.
This analysis is all a bit of fun, and I bet you can see it
in action for many products online, and not just when you buy a car or a new
TV.
As a start-up, you can use the pricing strategy of Telco C
to get a decent share of the market, which is great, but you might need to sell
out once you reach the natural cap in market share you will reach, plus you
have also screwed yourself out of the additional revenue required to actually
maintain and upgrade your product and customer service.
It would likely be better for Telco C to offer pricing and
bundles similar to Telco B. In which case they are forcing the choice to
between Telco’s B & C, and getting the customers to discount Telco A as the
non-choice as it is too expensive.
As a startup, this is a good strategy for you to follow too.
If you are unable to differentiate yourself by quality of service, then try other
incentives such as discounts for those customers who can convince other family
members to sign up, or unlimited download days, or gifts, or even having
upgraded data plans for the same price for selected customers (e.g. if you sign
up over a long weekend holiday, or for one in 50 customers.)
When you become aware of the game, as a consumer it can be
upsetting to see how you are being manipulated, but as a company owner I admire
the smarts of those companies that play this game strategically over the long
term. It is like watching a chess grandmaster in action – awe inspiring once
you know a bit about the game.
