1

2012

Business Research
Method
Research Proposal on
Determining a Reference Pricing Model for
the Indian telecom Industry
28-02-2012

Siddhartha Roy
Section E
PGP/015/321

[Type text]

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Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry

Table of Contents
Proposed Title: ........................................................................................................................................ 3
Abstract: .................................................................................................................................................. 3
Introduction: ........................................................................................................................................... 3
Value Added Services: ............................................................................................................................. 4
Problem Structuring: ............................................................................................................................... 5
Literature Review .................................................................................................................................... 6
Research Objectives .............................................................................................................................. 11
Research Questions .............................................................................................................................. 11
Proposed Methodology and Methods .................................................................................................. 12
Limitations of the Study ........................................................................................................................ 12
REFERENCES .......................................................................................................................................... 13

Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry

Proposed Title:
Determining a Reference Pricing Model for the Indian telecom Industry

Abstract:
The project tries to build a model of pricing for the telecom industry in India based on reference
pricing models. It takes into consideration the effects that separate usage and access fees have on
the customers and tries to gauge their expectations of a fair deal. Further an attempt is made to
build a model that takes into account the entry of Value Added Services in the Indian telecom sector
in a big way and its effects on pricing.
Keywords: Reference Pricing Model, Indian Telecom, Value Added Services

Introduction:
The telecom industry in India is marked by intense competition, ever decreasing call and
subscription rates and a gradually diminishing bottom-line for most players. However considering
the potential market size existing players refuse to exit and newer entrants keep coming up. Further
with developing technology, degree of recycling is high which essentially means that the same
customers come in as a new customer for a different technology (eg. Switching from 2G to 3G
services) and the pace at which they do so is quite high, in many cases, providing further
opportunities to the firms in question.
However the current trend in prices seem to very arbitrary in nature with the main result being
bleeding to death of the companies. There is indeed a number of regulatory roadblocks in case of
pricing of call rates, however, the potential for optimally pricing Value Added Services seems to be
unexplored or not given sufficient consumers.
In the current scenario, with the advent of third generation (3G) technologies and smart phones at
incredibly low prices has opened up a great window of opportunity for the industry. There is a huge
customer base that is just starting to explore the benefits of internet on phone, e-payments, playing
online games and so on and so forth. Besides there is a huge market that is yet to know of such
services let alone avail them. It is in this context that there is immense potential for optimally pricing
mobile telephony services in order to gain the maximum benefits out of the whole process and at
the same time provide good services to the customers.

Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry

Value Added Services:

Pricing of VAS in Indian Telecom Industry All the services other than standard voice calling are value added services, such as SMS, MMS, music
downloads, alerts etc. PWC believes that the mobile VAS market in India has the potential to
generate Rs 55,000 crores by 2015 which means it would double by that time.
Some interesting facts about VAS in Indian Telecom Industry:
Communication VAS services comprising of SMS, Video Calls, MMS and Email is expected to cross
Rs 20,000 crores by 2015 with a majority contribution by SMS
Information VAS services comprising news and alert based services is expected to cross Rs 7,900
crores by 2015
Entertainment VAS services comprising of Caller Tunes among other things is expected to be the
most profitable VAS segment and is expected to reach Rs 25,000 crores by 2015
Currently these are offered under various tariff plans. For example if 1 rupee is charged for a SMS
then there are monthly top ups for free SMS also. On one hand a cricket alert service is charged 5
rupees per one day match but on the other hand it can be obtained free of cost after paying a
minimum GPRS fee.
From pricing point of view, evolution of 3G has challenged traditional pricing of VAS in Indian
Telecom Industry and it is rapidly changing. A couple of years back it was not possible to download
unlimited MMS, wallpapers, ringtones, news and cricket scores for a amount as small as 100 rupees
but currently under a monthly GPRS plan of 100 rupees practically unlimited MMS, wallpapers,
ringtones, news and cricket scores can be downloaded.
Evolution of Android is likely to further challenge pricing of these services where an app can provide
some of these services free of cost. For example, games download contributes to a large chunk of
revenue from VAS but a plethora of games are freely available in Android. Gtalk and Gmail app
makes email and chatting free of cost by Android platform. So it might eat up a large chunk of the
revenue that comes from VAS provided by operators like Vodafone, Airtel, Idea etc.
So it would be interesting to study what would be the future of the pricing of VAS in Indian telecom
industry.

Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry

Problem Structuring:
STAKEHOLDER MAP:

Customers

Value Added
Service
Providers

Government

Telecom
Industry

Network
Operators

Retailers

STAKEHOLDER CHART

Customers

Government

Retailers

Low Usage Customers

Price Sensitive
Customers
High Usage
Customers
High VAS Usage
Customers

Telecom Ministry
Telecom Regulatory
Authority of India
(TRAI)
Department of
Telecommunications
Competition Council
of India

Company Owned
Stores
Local Retailers
Umbrella Retailers

Network
Operators
Airtle
Vodafone
BSNL
Idea
Tata Docomo
Newer Entrants

VAS Providers
Android Apps
Application
Developers
Music Companies
Sports Channels
Media and
Entertainment
Companies

Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry

Literature Review
One of the most important concept that plays a very significant role in the formation of prices was
given by Daniel Kahneman and Amos Tversky in their now legendary paper " Prospect Theory: An
Analysis of Decision under Risk where they provided an alternative to the more common expected
utility theory. The main premise was that people underweight outcomes that are merely probable in
nature in comparison with outcomes that are certain. They termed this as certainty effect that
ultimately contributes to risk aversion. A very easy way to understand their stand is to look at the
graph below. It shows that people tend to be more risk averse in case of losses which causes the
value of that product or service to decrease.1

Fig:

hypothetical value function.

We then study aspects of behavioural pricing and use market research for problem generation step.
We try and look into what the customer believes to fair price for usage and access and what is the
latitude for him. For this we look at a note by Professor John T. Gourville of Harvard Business School
on behavioural pricing where he shows the behavioural aspects of pricing from a consumers
perspective. He starts with the classical theory which states that a consumer will purchase a product
only if its perceived value is greater than its price. Then he introduces the concept of transactional
fairness as an important component of price acceptance.2

Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry

Fig: Value Pricing and the economic perspective

The above diagram ultimately transforms itself into the following equation when the behavioural
concepts are added. He then suggests some ways to manage perceptions of Transaction Fairness by:
1. Actively Managing Pricing Expectations
2. Actively Managing Perceptions of Cost of Goods Sold

Fig: Combining the Economic and Behavioral Drivers of Willingness to Pay

Consumers Willingness
to Pay

Economic Utility of
the Transaction

[Perceived Value Actual Price]

Fairness of the
Transaction

[(Perceived Value Actual Price)/ (Actual Price)]

[Actual Price Expected or Reference Price]
[Actual Price Cost of Goods Sold]

Then we look at a paper published by Shin-yi Wu of Nanyang Technological University and Rajiv D
Banker of Fox School of Business Management called Best Pricing Strategies for Information
Services. Here they provide a brief description of some of the recent research that has been carried
out in the area of Information Service pricing. These are summarized in the table below:
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Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry

They then present two propositions:

Proposition 1 (Pricing Scheme Selection When Customers Have Heterogeneous Willingness to Pay
Two Types) When there are two types of consumers characterized by heterogeneous willingness to
pay in the market, flat fee pricing and two-part tariff pricing yield the same profit, which is higher
than pure usage-based pricing.
Proposition 2 (Pricing Scheme Selection When Customers Have Heterogeneous Willingness to Pay
Multiple Types) When consumers are characterized by heterogeneous willingness to pay in the
market, flat fee pricing and two-part tariff pricing yield the same profit, which is higher than pure
usage-based pricing
Proposition 3 (Pricing Scheme Selection When Customers Have Heterogeneous Maximum
Consumption Levels) When there are two types of consumers characterized by heterogeneous
maximum consumption levels, a two-part tariff always dominates flat fee pricing and usage-based
pricing
Proposition 4 (Pricing Scheme Selection When the Total of Marginal and Monitoring Costs Are
Low) In the cases where customers are homogeneous or are characterized by heterogeneous
willingness to pay, when the total of the marginal cost and the monitoring cost is at a sufficiently low
level, flat fee pricing dominates two-part tariff pricing and usage-based pricing.3

Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry
Finally we look at work that has been done in the field of reference price research. Here we look at a
paper by Mazumdar, Raj and Sinha4; Reference Price Research: Review and Propositions. Here they
have provided a conceptual framework that can be used for a review of reference price research.

Here they go on state the following conceptualisation of reference prices:

1. Predictive Price Expectation: Shaped by consumers prior price expectation
2. Normative Reference Price: One that is deemed fair and just for the seller to charge
3. Aspiration Based Reference Price: Based on what others in a social group pay for the same
or similar product or service
They mainly focus on the expectation based reference price formation shaped by consumers prior
experience and current purchase environment. The basis for this conceptualization is derived from
Adaptation level theory, which states that the response of people to a stimulus is dependent on the
level to which they become adapted to. The antecedents to reference price formation are:1. Prior Purchase Experience: A commonly used IRP model for brand I and consumer H on
purchase occasion t is given by5:
=

+ 1

+ (1)
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Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry
This is a memory based model where the first two terms indicate the influence of prior prices while
the later indicates the effect of promotion on the consumer. Here , 0 1, indicates the
recency effect of the prior price exposures to price on IRP
2. Purchase Context Moderators: Apart from the parameters considered in case of point 1, IRP
is also influenced by the context in which the purchase is made; whether it is a unplanned or
regular shopping trip.
3. Store Environment Moderator: A brands IRP is generally also dependant on level of service,
the store type as well as the deals offered.
4. Product Category Moderators: This is mostly influential in cases of durables and has little
effect on the current work which is mainly a service.
As far as service that are continuously provided are concerned Bolton and Lennon (1999) propose
that they tend to use a priori norms of expected payments, performance and usage rates. This is the
area where not significant study has been carried out and will be the basis for the current work. It is
here that the current paper tries to find out whether a two part price is broken down and two
separate IRPs are formed or the two components are merged and a single IRP is formed. Mazumdar,
Raj and Sinha list out certain factors that might influence the formation of reference prices (either
single or multiple IRPs)6:
1. The relative magnitude of the fixed and the variable part of the price
2. The consumers need for controlling spending for the expense category ( e.g., monthly
cellular phone bills) and
3. The extent to which consumers link the amount spent with actual usage.
They further propose that an integrated IRP is formed when the variable component is rather low
compared to the fixed one. One the other hand when the consumer views price as determinant to
the usage, then separate IRPs may be formed.

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Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry

Research Objectives
The main aim of the current work would be to analyse whether there exists any pre-determined
model that is followed consciously or unconsciously by the players in determining the prices of the
offerings. For the purposes of restricting the width of the research, we would look into the setting of
the basic access fee; viz; the cost of a connection and the validity recharge and on the other hand
would look at the call rates and sms rates (access and usage). From the customers point of view the
attempt would be find out whether there exists some price that they consider fair and use it as a
reference and how does the price play into their volume and frequency of purchase. Further
whether the companies in question pay heed to such behavioural aspects of pricing or is it merely
imitation that drives the pricing mechanism in the industry.
Going ahead we look into how the entry of VAS in a big way with the adoption of 3G services is going
to alter the way services are priced in the industry and what could be the new determinants of
reference. What are the chances of existing services being cannibalized by the new services simply
because of pricing effects?
Here we try and use the theoretical frameworks presented in the papers above to determine how
reference prices are formed in the telecom industry and then try and find a correlation between the
prices obtained and the actual scenario in the industry and suggest possible changes in the pricing
pattern of the companies. We try and look into what the customer believes to fair price for usage
and access and what is the latitude for him.
The need is to understand how customers perceive losses. What are the magnitudes that make him
change his decisions? What do the customers perceive as a fair deal and not simply a good deal?

Research Questions
1. How can we increase the perceived value of a service and how it affects the price?
2. How to deal with price perceptions?
a. Is it through Bundling which is mostly a COGS approach
b. Is it by establishing credible reference prices?
3. Whether there are two separate IRPs; one for the access fee and one for the usage, or there
is a single integrated IRP?
4. What are the factors that might lead to formation of separate or integrated IRPs?
5. What is the impact of Advertised Reference Prices in the formation of IRP?
6. What could be a pricing structure for the new Value Added Services that would prevent the
outright cannibalisation of existing services?

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Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry

Proposed Methodology and Methods

The first part of the paper would be based on market research, both primary and secondary. In case
of primary research individual customers representing a sample of the population(here defined as
the cell phone owning population) would be interviewed on various parameters such as their choice
of operators as well the plans that they use. A focus group interview would be conducted in order to
gauge the preference for services among the customers and also the way the customers expect
them to be priced. Moreover secondary data would be used which include call rates, sms rates and
Value Added Services rates for the past 3 years of various network operators and an attempt would
be made to fit the whole data into a regression model in order to check the probability of a pattern
being followed unconsciously. The samples drawn would be probabilistic in nature.
Similarly data from other service industries with similar services like cable television etc. would be
analyzed to find out if there is a similarity in the trends obtained.
Further analysis of call duration statistic, usage of VAS, call centre statistics would be analysed to
find out if there exists a strong correlation between the price of a service and its usage.
We then use methods described in papers above to find out the perceived value of a service and its
objective value and then use the Adaptive Expectation Model to continuously filter data and arrive
at reference prices.
Here we can use the Bass Model7 for forecasting the adoption rate and thus the price structure to
be adopted by the players so as to avoid outright cannibalisation.

Limitations of the Study

There are a few limitations to the study. One of them being the need to transcribe subjective data
like customers willingness to purchase a service as well as his/her price perceptions into objective
data. Moreover there are constant changes in the regulatory framework of the government which
means any model derived is not at all permanent in nature and needs to have provisions for
continuous change. Further data may not be perfect and the samples of respondents drawn may
not be truly representative of the population.

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Business Research Method Determining a Reference Pricing Model for the Indian telecom Industry

REFERENCES
1.

Kahneman Daniel, Tversky Amos (1979) Prospect Theory: An Analysis of Decision

under Risk, Econometrica, 47(2),(Mar., 1979), 263-292.

2.
3.

Note on Behavioural Pricing: Assistant Professor John T Gournville, Harvard Business School,
9-599-114, May 25, 1999.
Shin-yi Wu, Banker Rajiv D. (2010), Best Pricing Strategy for Information Services,
Journal of the Association for Information Systems, 11( 6)( June), 339-366

4.

Mazumdar Tridib, Raj S.P. and Sinha Indrajit (2005), Reference Price Research : Review and
Propositions, Journal of Marketing, 69 (October), 84-102

5.

6.

Briesch, Richard A., Krishnamurthi Lakshman, Mazumdar Tridib, and Raj S.P. (1997), A
Comparative Analysis of Reference Price Models, Journal of Consumer Research, 24 (2),
202214.
Mazumdar Tridib, Raj S.P. and Sinha Indrajit (2005), Reference Price Research : Review and
Propositions, Journal of Marketing, 69 (October), 84-102

7.

Forecasting the Adoption of a New Product: Prof Elie Ofek and RA Peter Wickersham;
Harvard Business School; 9-505-062, Rev: March 9, 2005

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