June 2002

Ensuring Profitability in a Highly Dynamic Marketplace

By Lubomir Mortchev

In the network economy, business models have shifted from a product focus, where prices are rigid and sold directly from carrier to customer, to a services focus, where prices are dynamic and where service packages are often rebundled and sold indirectly through value chains. New business models are evolving every day, and service providers need innovative ways to bundle convergent services into meaningful customer packages, adopt differentiated pricing strategies, reduce market lead time, and manage the ecosystems that link suppliers, services, and customers.

Clearly, pricing drives billing, but pricing these emerging value-based services is no simple matter. Service providers need a very different set of tools to manage the complexities of convergent offers of telecom, data, and content providers. No longer can they simply focus on tracking revenues; there is now a complex web of service and content delivery costs that service providers need to track in real time. And these costs are always changing. Service providers are often dealing with content and data, whose value in many cases can degrade considerably in a very short period of time. This gives rise to the need for a new set of tools that can provide the flexibility to design, test, and implement creative new pricing policies far more rapidly than ever before.

Revenues Are No Longer A Sufficient Indicator
Carriers focusing on voice services have long relied on Average Revenue Per User (ARPU) as a business indicator. But in the new communications economy, that�s no longer a sufficient indicator of success. A typical voice call involves only fixed investments, and the incremental cost of carrying another call on these investments is zero. But in a services-oriented world where communications involve the delivery of everything from music to video to traffic updates, the costs associated with providing services � such as royalties, commissions, and sponsorship costs � are significant. 

What is the cost of reselling a movie? A music video? A song? The answer of course is, �it depends.� It depends on the demands of the content owner. It depends on the demands of the organization reselling the content to the carrier. It depends on the popularity of the content and its timeliness. It depends on the costs your resellers charge to promote your services. 

Keep in mind, of course, that all these costs can change from day to day, minute to minute. The royalties a provider will pay to offer a first-run movie will be high for the first few weeks the movie has been released, but the costs will drop after the movie has been out for a while and anyone can get it in a video store. The same thing is true with a music video or a popular song. As it ages, its value in the marketplace decreases, as do the costs of offering it.

Service providers incur these costs up and down the entire value chain. Indeed, every dollar of revenue derived from the delivery of these value-laden data and content services carries with it a set of costs that, if not closely managed, can seriously erode your profits. By itself, ARPU no longer matters. What matters, if anything, is gross margin per customer � that is, revenue minus cost � for that�s the only measure that will tell you if your pricing model is profitable. 

New Opportunities Demand New BSS
In this new world of convergent services, service providers must be able to manage both revenues and costs in real time in order to succeed. To do that, from a business support system (BSS) standpoint, service providers need a solution that enables a set of dynamic transaction management capabilities unlike any they have required in the past. The BSS systems for this environment go far beyond the legacy billing systems that service providers have always used. These systems need to provide high performance capabilities for managing relationships up and down the value chain, for performing complex multi-party billing and rating, and for simulating and assuring the profitability of a service completely before market introduction. And, of course, they cannot stand by themselves. They need to tie in with the service providers� operations service systems (OSS) infrastructure.

Instead of focusing on managing the direct relationship between the carrier and the customer, the new BSS requires capabilities to manage the relationships with all the players in the value chain � from the content providers to the resellers to the end customers themselves. Different providers will often play different, and sometimes multiple roles, and the system needs to accommodate the different roles they play. Your BSS systems need to support flexible royalty plans, reverse rating plans for prepaid services, detailed usage and revenue reporting, sponsorship plans that will allow one provider to underwrite the expenses of another � or that would enable one customer to sponsor some or all the usage of another customer. As new business and marketing models emerge, it becomes apparent that a key quality of this business relationship management solution is flexibility.

Performance and flexibility, too, are critical characteristics of a multi-party rating system. After all, service providers will be rating upstream to content providers, and downstream to resellers and customers so they can be paid, credited, or billed accordingly. Managing the converged services of the telecommunications, media, and IT/applications industries requires service providers to make a radical departure from their legacy price plan management methodologies, which have historically required companies to spend three to six months to design, build, and introduce a product to the market. When the premium price lifespan of a first run movie may be only four to eight weeks, service providers simply cannot operate in the ways that they used to. Content has a time value, and the period of time when it has the highest value is far briefer than the planning periods of years past. Service providers must be quick to introduce the new service and quick to change pricing and packaging in order to keep the service attractive and competitive.

Finally, maintaining control over all the variables in this dynamic environment requires a fast and powerful simulation system. Indeed, it needs to be a comprehensive solution that enables the service provider to factor in all considerations quickly, that enables all the service providers� business and technical personnel to participate effectively, and that delivers a clear and accurate picture indicating whether the service under consideration will generate profit. 

Enabling Profit Assurance
Profit assurance is key to the long term success of service providers competing in these rapidly changing times. With business infrastructure that can handle the rating for all players, that can help manage the business relationships up and down the value chain, and that can provide real-time simulation and rapid time to market for new price plans and services, a service provider can take strides towards profit assurance that a customer care and billing system would never enable. In the world of convergent services, with its rich relationships between carriers and content providers, customers, resellers, and still others, such tools can provide powerful support for long-term growth and business expansion.

Lubomir Mortchev is president and COO of Highdeal, a leading provider of dynamic pricing software for convergent telecommunications, content providers, and online services. Highdeal Software Suite features flexible, high-performance tools that can simulate, price, rate and project the revenue of convergent offers to assure profitability across the value chain. With a multi-party rating capability, Highdeal captures the transactions of value chain partners and manages revenues up and downstream. Please visit their Web site at www.highdeal.com.

[ Return To The June 2002 Table Of Contents ]