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AT&T's 61¢ - Because They Can

May 23, 2013, 4:35 p.m.
ABI Research

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AT&T announces a heavy-handed imposition of an arbitrary 61¢ fee per user and sets the twitterati ablaze. Megabits of commentary angst like “worst outcome” “destroy net neutrality” “punish their customer” have been spilled over this.

But why would AT&T do this? Because they can, and it is all in the pricing strategy. Now that AT&T is comfortable with their shiny new pricing tools and flexibility that comes with them, looks like someone in the Executive MBA program has discovered Price Elasticity of Demand.

The mathematically challenged can skip over this, but elasticity simply indicates how much AT&T can jack up the price, lose some customers, and make more money on those that remain. Check out Wikipedia for more that you ever want to know about this topic.

But why 61¢, why not $1 or $5 or $10? Because AT&T understands price elasticity of demand. When AT&T raises the price by 61¢, they know hardly anyone is going to bail on them, and so can impose this with impunity. $1 or $5 or $10 is just too much to swallow all at once, but give them time. For now, $500 - $600 Million will flow right to the bottom line. Brilliant! No fancy software tools, no focus groups, no high priced engineers and programmers, and no iPhone subsidies. Just a raw, brute force price increase. In six to 9 months, add another fee, then rinse and repeat a few more time. Marketing beats engineering every time!

Companies exist to maximize profit and are not charitable institutions. The entire goal of a pricing strategy is to get the various segments of their customer base to pay up to their willing maximum. The “punishments” spoken about are a psychological means to encourage people to willingly part with the maximum.

But why 61¢? Why not 99¢? That has some something to do with pricing psychology. Gasoline is priced in tenths of a penny as in $3.99 9 . Let the gas station on the opposite corner price at $4.00 and watch the line form across the street. And cell plans at AT&T are priced the same way - $39.99 and $69.99. Q.E.D.

Why a fee and not simply a price increase? Data usage is beyond mass market comprehension, so keep it simple - $30/3 Gigabyte. $50$/5 Gigabyte. And, don’t punish the customer and keep overages fair and reasonable - only $10/1 Gigabyte. After all, the mass market has no way of knowing how many Gigabytes they are consuming, though some might check after the fact. And how does AT&T count these Gigabytes?

Suppose AT&T decides on a direct price increase - how awkward do these sound?

$30.61/3 Gigabyte. Or maybe $30/0.980 Gigabytes? Or maybe $40.60/month? So, keep the plan and price simple, but goose the profits with fees. Now this sounds like an airline or a bank, not necessarily role models for sure, but it gets us to the point where everything of value is priced and monetized. Just wait until BigData Analytics reach full stride, “Would you like a Gigabyte of data with your fries, sir?”