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Analyst Angle: Hybrid pricing as a postpaid strategy for emerging markets

Editor’s Note: Welcome to our weekly feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry.

We recently conducted a study on postpaid strategies in Latin America, and one of the key findings was that more operators are using hybrid plans, such as contract plans with prepaid modules, as a way to encourage migration to postpaid platforms.

Subscribers of hybrid plans pay a monthly bill, and after reaching their monthly credit can obtain additional credit by recharging the phone through the prepaid system. Typically, hybrid pricing is used as a stimulus to expand the addressable postpaid market, mostly in prepaid-heavy, price-sensitive markets where customers are more reluctant to migrate to contract plans. Hybrid pricing, however, is increasingly benefiting operators in more affluent markets with comparatively higher percentages of postpaid users but which are seeing a resurgence of prepaid use.

Globally, there are several examples of markets that after having experienced significant postpaid growth for several years, have started seeing faster growth in prepaid subscriptions. This situation can be caused by different factors, such the development of the prepaid MVNO market or an influx of migrants with lower-than-average disposable income. In the case of the most advanced mobile markets in Latin America, Argentina and Chile, the situation has been caused by aggressive, prepaid customer acquisition strategies and most importantly, by the increased demand for prepaid data services.

In Chile, for example, after successfully targeting data plans at postpaid users, operators have increased their focus on selling prepaid data packages and prepaid mobile broadband, especially to younger users. Although they have been able to extract more value from prepaid customers in this way, a larger prepaid base means higher churn, and that in turn, makes it more difficult for operators to implement customer loyalty initiatives. In Chile, Telefónica has struggled to replicate its pan-regional strategy of migrating users from prepaid to postpaid plans. Faced with a resurgence of prepaid, Movistar Chile has introduced several promotions, which offer customers the ability to sign onto a hybrid plan for as little as Ps6,990 (U.S.$13) per month.

Hybrid pricing is an important postpaid strategy that operators can use and combine with other strategies such as targeting handset subsidies to postpaid users, on-net pricing and bundling products to offer a compelling postpaid proposition. But one might ask why should operators be concerned about growing their postpaid base, when many players in the prepaid heavy markets of Latin America show some of the highest operating margins in the world.

It is now well-established that prepaid platforms are not an obstacle to profitability, yet migrating customers to postpaid should remain a primary strategic objective for operators in emerging markets. The issue at stake is not profitability per se, but rather customer loyalty. In a postpaid world, customer loyalty is no longer identified with the cheapest promotion of the day but with a full set of practices over an extended period of time. In a postpaid world, operators are in a better position to extract more value, over a longer period of time, from their customers. This is why hybrid pricing is proving to be a highly important strategic tool.

Daniele Tricarico is an analyst for Latin America at Pyramid Research


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