Thursday, August 18, 2011

The Good, The Great, and The Bad Business Models

Lately, there's been a lot of complaining about AT&T because they "streamlined" their text messaging plans. In other words, they removed their cheapest plan thereby raising the rates for the casual "texter."

There are three basic business models when it comes to pricing technology over time:

1. Good: Lower your prices as your technology costs decrease like Amazon Web Services (pass along the savings).

2. Great: Keep your prices the same, but add new features like Apple (innovation).

3. Bad: Increase your prices, even as your costs decrease, without adding new features like AT&T (elasticity and conversion costs).

A college buddy, who worked for a large telecommunications company, explained the wireless carrier's business model best: Squeeze every possible penny out of every single customer.

It reminds me of the last time I ordered a home land line. The cost for caller ID was $7.99/month, but, the operator told me that this feature would be increasing to $9.99/month, for all customers, in two months. Seriously? A 25% increase just to display a 10 digit number on my phone?

From 2005 to 2009, as the costs for delivering text messages decreased, the wireless carrier oligopoly raised the prices to send or receive a single 160 character text message from 5¢ to 25¢. No new features were added – the wireless carriers simply realized that they could keep upping their prices without adding new features.

It was the iPhone that brought visual voice mail to market and it was when Google Voice relaunched Grand Central that we had the ability to send and receive free text messages using both our phone and computer. These two simple features could have been implemented by the wireless carriers years earlier.

Continually raising prices to see what the market will bear is a perfectly legitimate business model, but it really ticks off the customer. Like a big, faceless, bank, you almost hope that these companies will fail. I say almost, because any punishment, fine, or bankruptcy will be passed along to the customer.

We hate these businesses only as long as poetic justice doesn't come out of our own pocket.

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