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T-Mobile's Pricing Strategy Is a Game Changer
Although knowing how consumers arrive at their perceptions of value is critical to developing successful pricing strategies, sellers also must consider other factors, which is why developing a good pricing strategy is such a formidable challenge to all firms. This activity is important because consumers generally believe that price is one of the most important factors in their purchase decisions.
The goal of this activity is to demonstrate your understanding of what “price” is as a marketing concept, why it is important, how marketers set pricing objectives, and how various factors influence price setting.
Read the case about how T-Mobile implements its pricing strategy and then answer the questions that follow.
How do you decide on a cellular carrier? If you live in a populated region of the United States, the quality of the service provision likely is not your primary consideration. Whereas once the service was pretty spotty, today, the four largest providers—Verizon, Sprint, AT&T, and T-Mobile—all have good enough networks and systems. T-Mobile acquired Sprint in 2020, and the two brands continue to exist. Over time, however, everything “Sprint” will evolve to T-Mobile.1 Thus, consumers generally feel confident that they can make mobile calls, send text messages, check their apps, and scan online by using their data plans without much fear of service failures. In such a market, the major providers therefore compete mostly on price. For the purposes of this case study, let's consider T-Mobile and its efforts to differentiate itself with a positioning that describes it as the "Un-Carrier," through which it emphasizes its pricing transparency and value.
Historically, cellular carriers have offered a variety of tiered plans to consumers, priced differently according to the amount of minutes, text messages, and data usage they choose. An unlimited plan thus is more expensive than a severely limited one. But with its Un-Carrier initiative, T-Mobile introduced its intentions to offer T-Mobile One, a single plan for all customers. The plan differed from most of the options on the market when it was introduced. Many carriers already allowed consumers unlimited talk and text capabilities, but T-Mobile's big innovation was to include unlimited data in the base plan. Every T-Mobile One customer, paying about $70 for each line, would receive unlimited access.2
Once it had established this notion, T-Mobile also took the radical step of eliminating additional taxes or fees on the bills of its unlimited plan subscribers. Although those taxes and fees still had to be paid, they would not show up on consumers' monthly bills. By seemingly covering these fees, T-Mobile's own costs arguably rise relative to its competitors'. Yet the company believes that such consistent, easy pricing makes customers more likely to submit their monthly payments regularly, so it could reduce the number of service representatives it had to hire to contact delinquent accounts, thereby reducing its operating costs.3 Due to its transparency and simplicity, the new pricing structure also helped T-Mobile stand out from the crowded mobile field. In particular, the service innovations helped position T-Mobile as more customer friendly than its competitors, appealing to those who had considered leaving higher-priced carriers like Verizon and AT&T.
As a result, soon after the revised plan took effect, the number of subscribers to T-Mobile rose 8.6 percent relative to the previous year (and compared with growth rates of 2.6 percent for Sprint, 2.1 percent for Verizon, and 0.9 percent for AT&T). By the end of 2018, T-Mobile's total revenue had increased 6 percent, relative to the previous year, and it had captured more than half of the growth in the postpaid (prepaid) subscriber market.4
Noting these successes, Verizon, Sprint, and AT&T quickly followed T-Mobile's lead by introducing their own unlimited data plans at reasonable prices—though still not as low as T-Mobile's, as Exhibit 14.8 shows. In their ongoing competition for customers, the carriers had sought to offer additional valuable services to differentiate themselves. T-Mobile's unlimited customers get a free Netflix subscription; Verizon's buyers gain access to the Disney+ streaming service. For its subscribers, AT&T offers plans that range from $65 to $200 per month, some of which include HD-quality video streaming and free access to HBO.5
Exhibit 14.8: Cellular Phone Pricing Comparison
Company Cost for One Line Cost for Four Lines Taxes and Fees
T-Mobile $30*–$80 $120–$200 Included
AT&T $65–$85 $140–$200 Extra
Verizon $70–$90 $140–$210 Extra
Sprint $60–$80 $100–$180 Extra
*The T-Mobile $30 monthly Essentials plan does not include taxes and fees.
Source: Aaron Pressman, “The Mobile Price Wars Are On. Here’s How Much You Can Save,” Fortune, October 31, 2019.
Beyond adding more services to shift the value equation, these carriers also run a variety of promotions, especially targeting consumers who agree to switch from competitors. Some of the promotions T-Mobile has offered include matching any discounts that consumers receive from their current carrier and paying off up to $650 that customers owe on their current phones to Verizon so that they can keep their existing device even if they switch.6
References:
“FAQs About the New T-Mobile,” https://business.sprint.com/merger-faqs
Sarah Jacobsson Purewal, "T-Mobile’s Confusing ‘One’ Unlimited Plan, Explained,” CNET, September 1, 2016.
Ambrish Shah, “Why T-Mobile Believes Unlimited Strategy Is Sustainable,” Market Realist, April 7, 2017; “Why T-Mobile’s All-In Pricing Strategy Could Pay Off,” Forbes, January 12, 2017.
Ayoub Aouad, “T-Mobile Lays Out Growth Plans after Record-Breaking Revenue in Q4,” Business Insider, February 11, 2019.
Aaron Pressman, “The Mobile Price Wars Are On. Here’s How Much You Can Save,” Fortune, October 31, 2019.
Edward C. Baig, “T-Mobile Says It Will Match the Special Discounts Making You Reluctant to Leave Its Rivals,” USA Today, May 23, 2019; Andy Meek, “T-Mobile Wants You to ‘Break Up’ with Your Carrier for Its Valentine’s Promotion,” BGR, February 12, 2019.
Assume the elasticity of demand, a necessity with few substitutes, is 0.2. If T-Mobile raised its rates by 10 percent, we would expect