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Commerce Commission calls out mobile price confusion

In 2006, Theresa Gattung made a speech saying telcos use price confusion to make money. Not much has changed since she was CEO of Telecom.

Gattung said: “Think about pricing. What has every telco in the world done in the past? It has used confusion as its chief marketing tool. And that’s fine.

“You could argue that that’s how all of us keep calling prices up and get those revenues, high-margin businesses, keep them going for a lot longer than would have been the case.

“But at some level, whether they consciously articulate or not, customers know that’s what the game has been. They know we’re not being straight up.”

Confusion continues

That was 14 years ago. Since then New Zealand’s mobile market has changed beyond recognition. We’ve moved from a duopoly to three carriers; four if you count Spark-owned Skinny as separate, although that’s debatable.

Mobile technology has evolved from 3G to 4G to 5G. The Commerce Commission regulated mobile termination rates. This helped establish more competition.

People no longer come home from overseas facing crippling bills for roaming calls.

Many of the annoyances that plagued mobile consumers have been fixed.

But not all annoyances. Telcos continue to use mobile price confusion to baffle consumers.

Paying too much

Telecommunications Commissioner Tristan Gilbertson says it can mean we end up paying too much.

This isn’t a casual reckon. It emerged from an in-depth analysis of 80,000 mobile phone bills. The work is part of the commission’s Retail Service Quality programme. This is a series of projects tackling the remaining customer pain points.

For now, the commission has gloves on. It wants the industry to clean up its act. If that doesn’t happen, it has legislative backing to take a more active approach.

Research revelations

The research examined millions of data points. Researchers used data collected from carriers. The data is anonymous. There are interesting revelations.

Close to two-thirds (64 percent) of users did not change plans during the year-long review.

A quarter of post-paid consumers could save an estimated average of $11.60 a month by moving to a cheaper plan that would cover their usage.

Customer types

Post-paid is industry jargon for customers who have a contract with a mobile phone company. They get a bill at the end of each month. In other words they pay after they have used the service. You sometimes see them referred to as on contract customers.

The other type of customer has a pre-pay plan. They hand over money upfront before using their phones.

In many cases pre-pay customers get a fixed amount of calls, texts and data before having to pay again. In other cases they pay for a fixed number of days and can make as many calls as they want. These plans come with a set allocation of data.

Seven percent overpay by a large margin

Researchers found seven percent of mobile users pay for a lot more than they use. These people could potentially save an average of $48.65 a month if they switched to a more appropriate plan. They are high spenders when compared with the rest of the market.

That number needs context. Telcos measure success in markets like mobile using ARPU or average revenue per user.

At Spark, ARPU across the mobile business is $28.27 a month. Prepaid customers are worth an average of $13.33 a month, contract or post-pay customers have an ARPU of $42.

These numbers put the $48.65 that seven percent overpay into perspective. It’s a huge amount compared with average spends. They are paying at least twice the going rate.

Not shopping around

The Commerce Commission’s big-picture finding is that consumers don’t hunt down the best plans for their needs. It could be they are unable to find the information they need to make those decisions.

Two sets of information can help phone users make informed decisions about plans. The first are the plan details themselves. The second is transaction history.

If you are able to look back at your calls, texts and data use over the last year, you’d have a idea of how much you might use in future months.

You may be able to total the amounts and learn that, say, you never use more than this many calls minutes. Likewise, you can see when your data use peaks.

That would give you a starting point when looking at advertised plans.

Hard to find

In practice this information is hard to find.

There are places where you can get usage data. Mobile company phone apps store a limited amount of information.

Take the Skinny app. It is more geared towards
selling more services to customers than keeping them informed.

There is a transaction history. Yet it covers a mere two weeks of calls and data use. That’s not a starting point for a useful comparison.

The Skinny website shows more data. Not much more. There you can find three months of transaction history. That’s better, but it’s not enough to tease out seasonal or long term patterns. Any statistician will tell you that three data points is not enough to spot a trend.

There was a time when printed telephone bills contained all the necessary information. If you get one, not all carriers have them, Skinny does not, you have to download and store them on your computer. If you don’t, they soon drop out of sight. Phone companies keep them live for a few months, not the long term.

You could get the impression carriers don’t want customers to make meaningful long term comparisons.

Electricity, water perform better

Contrast this lack of information with, say, electricity or water companies.

Electricity retailers send statements every month. All the information needed to make a wise buying decision is there in full view.

An electricity bill might show the average daily use over the last 12 months in a handy graph format. Retailers contact customers to check they are on the best, read that as cheapest, option. If not, they help customers change.

They do this because they know keeping customers informed is good business practice. It builds loyalty. They understand how easy it is to switch if a customer feels they not getting the best deal.

Water companies tell customers how much their home uses compared with others. It’s information they can use to manage consumption.

Learned helplessness

In subtle ways mobile companies train consumers to not link phone use to their spending.

Take unlimited plans. Plans can come with unlimited voice calling, texts or, up to a point, data. They look good to consumers because they no longer have to worry about bill shock. The cost is a predictable fixed amount every month.

That can be good, yet few people need unlimited amounts of mobile calls or data. We use less data than we think. Often, a lot less.

The research found average monthly consumption across all users is 2.2GB of data and 163 voice minutes. The median data consumption for the top five percent of users is 4.8GB a month. For these people, an unlimited plan makes sense. For everyone else, there are cheaper options.

Another feature of unlimited plans is in some cases the usage information is not longer shown. That means customers can’t always tell if a cheaper plan might be a better choice.

Going over the limit

Another way carriers train us to buy more mobile than we need comes from charges for going over limits. We all remember horrific newspaper stories about people facing huge bills for going over the data or call allocation.

To avoid these charges people buy unlimited plans or plans that leave a lot of headroom.

In practice, going over the limit is not always expensive. If you are on a $40 plan with 2GB of data, an extra gigabit costs around $5.50. That’s a one-off. Moving up to a higher level plan is likely to cost you an extra $20 every month. That’s a huge difference.

Spotify and other extras

When you look at mobile phone plans on the telco website you’ll see extras bundled into various plans. There are services like Spotify or Netflix, the ability to use wi-fi hotspots, wi-fi calling to name a few.

At times the marketing material attaches a value to these extras. If you want them, fine. If not, they are of no value. They muddy the water when you’re trying to find the best value for your needs.

Hard comparison

Making direct comparisons between plans from different mobile phone companies can be hard. Sometimes it is as hard to compare different prices from the same company.

At the time of writing Spark offers the Endless Mobile plan for $39.99 a month. It’s a post-paid plan. That is, you pay when you get a bill at the end of each month.

‘Endless’ is the word of the month with New Zealand’s mobile phone companies. Spark has Endless Mobile. Spark’s Skinny subsidiary offers Endless Data plans. The words ‘Endless Data’ are prominent on Vodafone’s mobile plan page at the time of writing.

Endless mobile price confusion

You need to be careful with words like ‘endless’ in mobile marketing. It may not mean what you think it means.

In this context, endless does not mean unrestricted. Endless is a phone company way of saying: “We’re not going to stop you using data. Yet after you have used a certain amount, we’ll slow your data down”.

Spark’s Endless Mobile plan includes unlimited voice minutes and text messaging. You get 3GB of data at normal speed, if you go over the allocation, Spark will drop the data speed. All endless plans have similar restrictions.

Skinny is Spark’s budget mobile phone brand. The plans are pre-paid. You hand over your money upfront.

The Skinny Endless data plan has the same unlimited voice minutes and text messaging. It comes with a more generous 4.5G data allocation at normal speed. Like the Spark plan, data speeds drop when you go over the limit.

28 days is not a month

At first sight the $36 price of Skinny’s plan looks to be a few dollars less than the Spark plan. That’s until you notice that Skinny charges you on a 28-day cycle. That is, you pay Skinny 13 times a year.

Over the course of a year you would pay Spark $480 or pay Skinny $468. The difference is about enough to buy morning coffee and sandwich. What looks like a 10 percent price difference of $40 compared with $36 is, in fact, 0.025%.

You’d need to be an arithmetic whizz to know if the 2degrees pay monthly pre-paid options are better value than the company’s 14 day pre-paid options. There are few points of reference for a meaningful comparison.

Cheaper by the kilogram

Confusing prices are not restricted to mobile phone plans. If you shop for, say, mayonnaise in a supermarket, the product comes in uneven size packages. The average consumer can’t tell if the 387 gram jar is better value than the 485 gram option.

Supermarket shopping is easier because shelf labels must show an per kilogram price.

Something similar happens when you buy, say, a large screen TV on credit terms. The headline might show interest rates and promises of nothing to pay for months. Yet the small print has to outline the real interest rate and upfront costs.

Mixed reaction from industry

Spark welcomed the letter and says it is looking for ways to improve customer experience. It went on to say it provides users with 12 months of account information. Spark’s Skinny brand does not. It says it is simplifying plans and will “engage with customers and advise them of options”.

Vodafone was more defensive. It turned the Commission’s numbers around. It says customer churn in the mobile sector is higher than in electricity or banking.

Vodafone went on to argue the high rate of churn creates unnecessary costs for the industry. It went on to say if seven percent pay too much, then 93 percent pay a fair amount. This misses the quarter of customers who overpay.

One good point raised by Vodafone is that last year the Commerce Commission reported that market competition is strong and New Zealanders pay less than the OECD average for mobile. This is true, but it doesn’t mean price structures are fair or that consumers get the treatment they deserve.

Wide support

In contrast the Commerce Commission’s move was welcomed by the Technology Users Association of NZ. CEO Craig Young called on the mobile companies to follow the recommendations. He notes how difficult it is for customers to compare plans between the carriers.

FinCap, a budget advice service weighed-in saying the Commerce Commission’s move could reduce financial hardship for people on the wrong plan.

Chief Executive Tim Barnett says: “Some people may be able to absorb this extra cost in their household spending, but for others this overspending may mean they fall behind in their payments.

“The consequences of falling behind on mobile bills could include bills being sent to debt collection or that customers experience drops in credit ratings. These measures can be very harmful to vulnerable consumers.”

That would be harmful for the telcos. During the Covid-19 lockdowns they warned investors they could soon face a wave of bad debt.

Consumer NZ chief executive Jon Duffy says: “Creating confusion has been a long-standing marketing tactic in the industry. Telcos rely on it to reduce the likelihood consumers will shop around.”

His organisation’s own research underlines the Commerce Commission’s work. Consumer NZ found 33 percent of consumers think it’s easy to compare mobile plans while 38 percent think it’s easy to switch companies.

The mobile price confusion ball is in their court

The Telecommunications Commissioner asked mobile phone companies to make comparisons easier. He doesn’t tell them how to do it. Instead the ball is in their court. The supermarket, credit and electricity sectors all show examples of how they can improve.

Possible improvements include allowing customers to have access to a whole year of transaction history, the would include voice calls, text messages and data use. Carriers could watch to see if customers are overspending and automatically inform them of plans that better suit their needs.

The Commission would like to see a ‘consumer data right’. Consumers would be able to show rival carriers their current use and spend in a way that would allow comparisons and, where appropriate, encourage a better offer.

Australia is moving towards a similar idea. There, the project is government lead and will be imposed on carriers. Telecommunications Commissioner Gilbertson would prefer the carriers to manage the process in New Zealand. He has asked the industry’s own Telecommunications Forum, to look at this.

It’s fair to say New Zealand’s mobile sector has come a long way since Theresa Gattung’s speech. On the whole competition is delivering benefits to consumers. Yet price confusion remains an everyday business practice and a pain point the industry regulator wants to fix.

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