Designing Mobile services: pricing and dynamic service ... - CiteSeerX

Designing business models for mobile service bundles Harry Bouwman, Delft University of Technology, Faculty of Technology, Policy and Management, PO Box 5015, 2600 GA Delft, The Netherlands w.a.g.a.bouwman @tbm.tudelft.nl Edward Faber and Timber Haaker, Telematica Instituut, Enschede, The Netherlands {Edward Faber, Timber.Haaker}@telin.nl

Abstract Designing business models for mobile service bundles is a complex undertaking. Service bundling will be an important driver for the use of 3G+ services. These service bundles have to be supported by business models of multiple involved actors. These actors have to balance different design requirements, strategic interests and business logics to create a ‘win-win’ situation, in which each actor has incentives to co-operate in offering service bundles. Notwithstanding the wide application of bundling strategies still little is known about what constitutes a successful bundle. Clear guidelines neither for the design of service bundles, nor for the underlying business models are available. In this paper we discuss critical design issues for service bundling and their relation with customer value based on a literature review and a number of case studies of existing mobile service bundles.

Keywords: 3G, service bundles, service design, case study

1. Introduction The development of new networks like GPRS (2,5 G), UMTS (3G), WLAN (WiFi), and Personal Area Networks (beyond 3G) will spark the development of mobile services. It is expected that this will be a multi-billion industry. Mobile operators paid a total of $125 billion for licenses to build and operate 3G networks, while it is expected that in the period 2002 -2007 the same amount is required to build the actual network (Economist,

Sep 2nd, 2004; Forge, 2004). It is clear that Return on Investment depends on the capability of mobile operators to develop mobile services that are attractive to skeptical end-users and meet their needs and requirements. Most industry players currently lack the resources and capabilities to exploit these opportunities on their own. Hence mobile operators need to collaborate with content, service providers and other actors, such as hardware and middleware providers to offer profitable and valuable mobile services (Ballon, 2004; Forge, 2004). Service bundles are expected to play a central role in the success of next generation mobile services. Bundling is a form of versioning of products in which two or more distinct products are offered as a package at a single price (Shapiro & Varian, 1999, p. 73). Bundling of core products and/or services is a well-known phenomenon in the Telecommunication Industry. Packages in which telephony services are combined with wireless and Internet services are common. Bundling of mobile services with 'an almost for free' handset is common practice. The intent of Telecom Operators is straightforward: increasing revenue, lower churn-rates and improve margins. Notwithstanding the wide application of bundling strategies still little is known about what constitutes a successful bundle. Service bundling is, in contrast with product bundling, a rather new concept. Research on service bundling focused mainly on bundling of services with auxiliary or support services (Simons & Bouwman, 2004), and not on complementary services that are equal to the core service, i.e. voice communication services, mms-services or mobile data-services. However research on bundling of core services is limited, and there is scarce attention for the underlying business models (Ballon, 2004). Moreover there are no clear design guidelines for the design of service bundles, nor for the underlying business models. In this paper we will therefore focus on critical design issues for the development of (business models for) services bundles and what we can learn from existing bundles in the mobile domain. We present research on critical design issues of business models for mobile services bundles. The objective of the paper is to better understand what constitutes a viable service bundle. Before we present our research we will first discuss the research framework.

2. Research framework In 2002 we started research on the design of business models for mobile 3G services. On basis of a number of cases we developed an analytical framework and a method to design business models (see Bouwman et al, 2004; Faber et al, 2004; Haaker et al, 2004a and 2004b). In our model (see Figure 1), we distinguish four components that are mutually interdependent as indicated the arrows in figure 1: •

Service domain: a description of the value proposition (added value of a service) and the market segment at which the service is targeted;

•

Technology domain: a description of the technical functionality required to realize the service;

•

Organization domain: a description of the structure of the multi-actor value network required to create and distribute the service, and to describe the focal firm’s position within this value network;

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Finance domain: a description of the way a value network intends to generate revenues from a particular service and of the way risks, investments and revenues are divided among the various actors within the network. M AR K ET O PP O RTU N ITIE S e.g. Im provem ent of com m unication in the Healthcare

BUSINESS MO DEL S ER VIC E D OM AIN V alue proposition M arket segm ent TEC H N IC AL D EV ELO PM EN TS e.g. U M TS , W eb services

N ETW OR K V ALUE e.g. revenues TEC H N OLO G Y D OM AIN Functionality required

FIN AN C E D OM AIN C ost structure Profit potential C U STOM E R V ALUE e.g. usefulness O R G AN IZ ATION D OM AIN Structure of value network

R EG U LATO R Y C H AN G ES

Figure 1: Descriptive business model framework

The challenging aspect of analyzing and designing business models is that it requires managers to connect and balance design choices in different business model domains (service, technology, organization, and finance domain) in the face of technical, market, and legal developments, the ultimate aim being to create sufficient value for service providers and customer value for end users. For instance, what makes sense from a technical point of view (more accurate specifications of positioning technology) may not make sense from a financial (higher costs) and user perspective (privacy concerns). Moreover, organizations have to balance different interests and business logics, for instance of telecommunication operators with content providers, to create a situation, whereby each player has an incentive to cooperate, and the combined benefits are higher and the efforts smaller, compared to a situation in which each of the players is operating separately. Existing literature on network and network formation (Gulati, Nohria, & Zaheer, 2000, Kothandaraman & Wilson, 2001), on the definition of business and revenue models (Timmers, 1998), taxonomies (Afuah & Tucci, 2001), strategy (Hedman, & Kalling, 2003) and ontology (Osterwalder & Pigneur, 2002), as well as on mobile value chains and networks (Barnes, 2002; Li & Whalley, 2002) individually fails to provide insight into the subtleties involved in the design of business models. However, if used in combination, as is done in our framework, these approaches and concepts help to develop insight into how organizations can design ‘balanced’ business models. Our framework goes beyond identifying simple success prescriptions and tries to understand the critical design issues in business models and their interdependencies. In previous research our focus was primarily focused on identifying critical design issues in business models for mobile services per se (Bouwman et al, 2004; Faber et al, 2004; Haaker et al, 2004a and 2004b). Based on the business model framework described above and in-depth analyses of 18 cases of mobile services a causal framework has been developed that explains expected customer value of mobile services (see Figure 2). The framework assumes that when service developers appropriately deal with the different critical design issues it will for instance result in clear target group definitions with acceptable mass, compelling value propositions, acceptable level of service quality combined with non-obtrusive customer retention mechanism. High scores on these so-

called critical success factors will result in a service that meets the expectations of users, i.e. a service that generates customer value. It can be expected that a service that generates customer value can result in a viable business model in the long run. Critical design issues originating from the technology domain can be considered to be enablers for critical design issues that originate from the service domain. For instance customer reach is enabled by easy access and ease of use of services for customers.

Figure 2 Causal framework explaining customer value

This paper aims at extending our empirical work (case-studies and validation of our design approach) to include critical design issues in business models for mobile service

bundles. We focus our analysis to the service and technology domain, because design choices in the service and technology domain are closely related and significantly impact the customer value of a service offering.

3 Factors influencing the customer value of service bundles The central issue in the service domain is ‘value’. Value is seen as the perceived benefits and total costs (or sacrifice) of (obtaining) a product or service for customers in target markets (Chen & Dubinsky, 2003; Petrovic & Kittl, 2002). The service offering must be considered better, and deliver the desired satisfaction more effectively and efficiently than competitors. Important factors that influence the value of service bundles are discussed below. The focus is on service-related factors, factors that can be attributed to the service offering, and which service providers can directly influence. Bundle focus: an important design issue is choosing a profitable target group and associated with that determining the bundle focus and scope. Should the service bundle be targeted towards consumers or business? Should the service bundle be targeted towards a niche market or a mass market? Should the service bundle have a clear focus (theme), or should it be broad in scope? Bundling strategy: service provides can opt for three different bundling strategies: pure component strategy (unbundled offer), pure bundling strategy (components available only in bundled form) and mixed bundling strategy (components available in bundled form as well as separately) (Adams & Yellen, 1976). Bundle composition: a bundle can be composed of related and unrelated services. Services may be reinforcing (e.g. communication and presence information), complementary (e.g. mobile phone and subscription), unrelated (e.g. ring tone and weather information service) or competing (e.g. ring tone service A and B). Harlem et al. (1995) suggest that bundles composed of complements have higher purchase intent than bundles of similar or unrelated products. Pricing: price discrimination refers to charging different prices to different customers for the same goods or services (Shapiro and Varian, 1999). Shapiro and Varian distinguish between three forms of price discrimination (1) personalized pricing, (2) group pricing and (3) versioning. Klein and Loebbecke (2003) add (4) bundling and (5) price

discrimination based on sales volume. Empirical data shows that differential pricing is already widespread in industries that exhibit large fixed costs like airlines, telecom or publishing (Varian, 1996). For example in the telecom industry differential pricing may be based on customer characteristics, e.g. preference for pre-paid or post-paid, group characteristics, e.g. student discounts, product characteristics, e.g. tailored bundling of specific services and features (e.g device, voice and data services), and volume (the more minutes you call the cheaper the price per minute). In the airline industry business travelers are typically time-sensitive and leisure travelers typically price-sensitive. To effectively differentiate between business travelers and leisure travelers the airline industry offers cheaper tickets only if a weekend is part of the trip (Klein and Loebbecke, 2003). Branding is also found to have a profound effect on consumers’ evaluation of product or service bundles. Although a manufacturer may decide to introduce a new product on its own, it also may opt to promote it through bundling with an existing product which carriers either the same brand name or a different brand name. Results of Grace and O’Cass (2005) indicate that brand evidence along with advertising and promotions significantly influence consumer satisfaction, attitude, and behavioral intentions towards service brands. The findings of Simonin & Ruth (1995) suggest that a brand umbrella (within brand) bundling strategy would enhance consumers’ evaluation of the bundle and the new product. Moreover, consumers’ reservation prices for the new product can be artificially raised for a not so-well-liked brand through a clever association with a wellliked tie in. The central issue in the technology domain is ‘functionality’. Functionality can be defined as ‘the things a system or application can do’ for its end-users. Examples of functionality enabled by 2,5 and 3G mobile services are: ‘always on’ capabilities, and higher data rates, which are assumed to carry video and sound clips. Below two important factors, management of user profiles and service integration, influencing customer value from the technology domain are discussed. Management of user profiles: for personalization of a service, a user profile that contains user context, preferences and behavior must me created and maintained. For instance, for MSN Messenger the Instant Messaging server keeps a profile for each user. A privacy

statement is issued to users about the protection of the provided data. The management of this profile, i.e. creation, use, maintenance and access to the profile, requires functionality that may be realized in different ways. Balancing is needed between user involvement and automatic profile generation, and between privacy and access to users profiles. We introduce three alternatives for profile management. •

Self-management would imply that users are the initiators when it comes to manage specific issues, such as privacy, service bundling preferences, etc. This control could be done either manually by asking users to respond dynamically or through a number of (domain and user specific) preferences and rules that can govern self-management behavior.

•

Group management. When a group of users share a service or service bundle, control issues become more complicated. A number of factors influence this control such as the roles of the users in the group, possible hierarchical relations, the type of information to be controlled, and the context of users.

•

Autonomous management. Due to the huge amount of information that need to be controlled, and due to the design requirements of flexibility and ease of use, there will be an ongoing issue of balancing between the amount of flexibility required and the involvement of users. Therefore, a third way of controlling, autonomous control can be applied as well. Autonomous control basically implies that software will manage the applications based on predefined preferences.

Service integration The extent to which services in a bundle are integrated influences the customer value of a bundle. Due to integration the value of the bundle may be more than the sum of the value of the individual elements. For instance, Microsoft Office is a product that bundles a word processor, a spreadsheet, a database and a presentation tool. Service integration allows users for instance to copy and paste pictures made in Powerpoint into MSword and vice versa. Our literature review revealed the following critical design issues for service bundling to be relevant: targeting (mass, niche market), bundle strategy (mixed, pure), bundle composition (core, complementary, unrelated, reinforcing, competing), pricing (personalized pricing, group pricing and versioning), branding (brand umbrella or not),

profile management (self, group, and autonomous), and service integration (fully, partly integrated, independent). Based on this literature review we extended our causal framework for explaining customer value (see figure 3) to include service bundle issues and looked for evidence of these issues in several cases of mobile service bundles.

Figure 3: revised causal framework explaining the customer value of service bundles

4 Explorative case studies We have analyzed thirteen illustrative cases of existing mobile service bundles. The cases described were either part of case studies performed in previous projects, or were obtained through an Internet search. Selection criteria were (1) that they should comprise of at least one mobile service element, (2) that they provide illustrative examples of current service bundles and (3) that they collectively give an overview of different

service bundle practices. The cases of previous projects are available in a database. The Internet based cases were added to the database. In the cases we specifically looked for illustrations of the critical design issues as presented in figure 3, specifically related to service bundles. We divided our thirteen cases over five service bundle categories as follows: •

Portal oriented bundles. All five Dutch mobile operators provide portals to mobile services of third parties. On the one hand these portals function as a distribution channel for parties providing mobile services. On the other hand the portal provides customers access to these services. Revenues are generated from charging customers for data transport and charging providers for support functions (e.g. billing).

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Community oriented bundles. These bundles are primarily aimed at services that support communities (formation and preserving of communities).

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Interaction oriented bundles. These bundles are primarily provided for services that allow for interaction between the user and one or more knowledgeable professionals. Often these interactions are event based or context dependent.

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Content oriented bundles These bundles are provided primarily information or entertainment services. The services may provide for information (news, weather) that is of general interest, or specific information structured around a specific theme targeted at a specific segment.

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Transaction oriented bundles These bundles are primarily provided for transactional services, for example a payment service, online shopping or banking services. Typically involves transfer of monetary value, purchase or acquisition.

Although these bundles have a clear focus, more often than not they also contain service elements that fit with other categories. For example a content bundle may contain an interaction service element, and transaction bundles usually contain some information/content services.

5 Results The cases reveal different choices on the identified design issues. Table 1 provides an overview of the service bundle composition. The overview is based on the distinction in

service type (portals, community focused, interaction focused, content focused, transaction focused). For each case, the first row in the table depicts the core services in the bundle. The second row shows the complementary services. In the columns the main concepts as discussed in the theoretical part of this paper are presented. The studied portals from the mobile telecommunications operators are primarily distribution channels for (third party) mobile services and environments for creating mobile service bundles. For example the Postbank mobile information services are available on four mobile operator portals: i-mode, Live!, T-zone, and Orangeworld. These portals are comparable to supermarkets where customers select their specific package from the available product offering. The actual service bundle varies from customer to customer and contains at least data transport and portal access, combined with email and the 3rd party content services of choice. Note that these content services are neither bundled with regard to price (price bundling) nor integrated (product bundling). Portal services are mainly based on pre-paid and subscription models. It is worthwhile noting that a portfolio of related mobile services, offered by a single provider, e.g. a bank, is not necessarily perceived as a bundle of mobile services by consumers as the services are offered via different channels. For example both the Postbank as well as ABNAmro provide mobile banking and SMS alert services (e.g. with regard to account balance) via separate channels. The same goes for CNN news bundle. This is basically only a bundle from CNN’s perspective, as these services are provided through several wireless operators. Customers can only select those CNNtoGo services that are provided through their operator of choice. The community oriented bundles are typically bundled with text-based communication and content services, which stimulate community formation. In the Botfighter case branding and strategic collaboration with a dominant mobile telecommunication operator is a more important driver. In the case of Blah some customers may regard premium content as a core service, whereas service providers may regard text-based communication (SMS) as core service given their part in generating profits. The core service of MSN messenger is text-based communication coupled with presence. In the case of MSN these are more auxiliary services for instance profile matching, price comparison, and emoticon trade, than complementary services.

Table 1 Bundle characteristics Bundle category

Case

Portal oriented bundles

I-mode

Live!

Orange world

Community oriented bundles

Botfighter

Core/ Comple mentary Core

Services

Bundle focus

Bundle strategy

Bundle composition

Pricing

Branding

Service integration

Profile management

Communication services

Pure

Self management

Core


Pure

TO brand and co-branding

Independen t services

Self management

Comple mentary

Wide range of entertainment, information and transaction services

Mass: broad scope

Prepay/ subscription Pay per use; Service subscription; Data traffic Prepay/ subscription Pay per use; Service subscription



Complementary: device + subscription Competing, unrelated services Complementary: device + subscription Competing, unrelated services


Comple mentary

Mass: broad scope

Core


Pure

Prepay/ subscription Flat fee price bundle for data services


Self management


Complementary: device + subscription Competing, unrelated services


Comple mentary

Mass: broad scope

Core

Robot profile (via Internet), Game (get mission, scan, fire) via text messages Text based mobile communication, Internet chat, Game information

Niche: gaming

Pure

Complementary and reinforcing services

No subscription; Premium SMS

Tie in with TO brand

Integrated

Core

Text based mobile communication (sms), profile matching

Pure

New brand


Entertainment: games, quizzes, ring tones, wallpapers Information: music, theatre, events Text based communication and sharing presence info

Complementary and reinforcing services (generate traffic)

SMS

Comple mentary

Mass (youth): wireless community

Self management: robot profile; Autonomous management: collection of location Self management: profile; Group management: groups

Mass

Mixed

Complementary services

Free/ data traffic; Pay per product

Microsoft

Integrated

Comple mentary

Blah!

MSN

Core

Self management:

Bundle category

Interaction oriented bundles

Case

OnStar

Core Comple mentary

Predoc

Content oriented bundles

Core/ Comple mentary Comple mentary

P-info

Voice & video communication; SMS service; Profile matching; Sharing info on music listening; Price comparison; Search service; Emoticon trade; Buying/selling via buddies; Music download Emergency Services, Air Bag Deployment Notification Personal Calling; Information/Convenience; Stolen Vehicle Tracking; Remote Door Unlock; Driving Directions

Bundle focus

Bundle strategy

Bundle composition

Pricing

Auxiliary services (presence + communication + emoticons)

(emoticons)

Branding

Service integration

Profile management Preferences and context; Group management: Buddy lists

Niche: safety

Mixed


Subscription

Tie in with GM brand

Integrated

Self management: user preferences; Autonomous management: collection of context information Self management

Core

Semi personalized paper newsletter; Personal counseling (on medication)

Niche: health

Pure


Subscription/ SMS

New brand

Independen t

Comple mentary

Information market; SMS news alerts on medication; Health tests for reduced price information services (mobile queries in data bases); Location services; Reporting on tasks E-mail Office applications

Niche: focused on police officers

Pure


-

No branding

Integration

(rich) text based news channels; News alerts; Newscast with video; News via satellite radio

Mass

Mixed


Operator dependent

Content Provider branding

Independen t

Central management: Profile. Autonomous management: Location Self management

Information services: city guide, listings; Finder service; Navigation; Audio tours

Niche: tourists

Pure


Flat fee (service +device)

New brand

Partly integrated

Central management

Core

Comple mentary CNN news services

Services

Core

Comple mentary Time Spots

Core

Bundle category

Transaction oriented

Case

Postbank mobile information services 1 ABNAmro mobile services

1

Core/ Comple mentary Comple mentary

Core

Comple mentary Core Comple mentary

Services

E-mail; Voice; Chat with other users; Limited Internet access; Gaming; Device with camera; Vouchers, discounts; Delivering TimeSpots device; Hospitality desk Arrange appointment with mortgage advisor; Mortgage calculator; Service number for blocking pin-passes; Buy travel insurance Stock quotes; Special mobile phone offer Mobile banking 2 (account check, money transfer) ; Managing stock portfolio Mobile site 3 with (financial) news

Bundle focus

Bundle strategy

Bundle composition

Pricing

Branding

Service integration

Profile management Autonomous management: location

Mass: banking

Mixed


Operator dependent

Brand of Bank and Cobranding with TO

Independen t

Self management

Mass: banking

Mixed


Operator dependent

Bank brand

Independen t

Self management

These information services are available via WAP and a number of portals: I-mode (KPN), Live! (Vodafone), T-zones (T-mobile), Orangeworld (Orange). Postbank also offers SMS alert services and mobile banking. Both can be directly ordered from Postbank. Upgrading of pre-paid mobile phone accounts directly from a postbank account is also a mobile service offered by Postbank and most Mobile operators. 2 Available via: WAP, I-mode, Orangeworld, PDA (Internet); 3 Freely available to everyone

Pricing is not a big issue in community oriented bundles, and is basically based on SMS tariffs. Community services bundles are (almost) for free. Here we also see that the core and support services are more integrated and more profile management tools are at place. Interaction services are niche oriented and both the core and complementary services are therefore rather specific, i.e. emergency services and medical counseling services. Onstar is an example of bundling of services with a dedicated device. The choice for a subscription based pricing model is an artifact from the niche focus. The content oriented bundles are directed to niche and mass markets. Like in the interaction oriented niche bundles the type of core and complementary services are rather specific. Like Onstar P-info and Time Spots are examples of bundling of services with a dedicated device, in car information system for P-info and specific Time Spots device. The pricing schemes are heterogeneous, as well as the branding, service integration and profile management. Transaction services (e.g. mobile payment) are typically bundled with content services, which generate transactions. Content and transaction bundles are telecommunication provider dependent. Whereas P-info, CNN, Postbank and ABN-Amro focus on specific service types (e.g. information or transaction services), MSN Messenger, Blah and Botfighter focus on several service types (e.g. communication, community, content, and transaction services).

6 Conclusion and discussion Our research is limited in several ways. First of all research on services bundles, in contrast to product bundling, and more specifically research in 3G+ mobile bundles, is rather scarce. This paper is a starting point for further conceptualization of research in this domain, more specifically towards designing adaptive, we-centric context aware service bundles. From the selection of cases it is clear that bundles in the mobile domain are still rather limited, and either offer portals for combination of services that are hardly integrated, or are community oriented and then are less commercial in nature. Our selection of cases may affect our results. Although we would have preferred analyzing adaptive, we-centric context aware service bundles, we are not aware of such existing service bundles. Second our approach is mainly starting from the supplier perspective it is

hard or almost impossible to ignore the user side, specifically from the service and technological domain. Third by making use of illustrative cases we get some insights in the causalities of the relations in our revised research framework. We are aware that a more fundamental testing of this framework is necessary. A research design for such an empirical test is however hard to realize seen the real-world nature of our object of study and the many disturbing factors that play a role. Furthermore selection of the proper research unit: the service bundles as cases, involved managers, or customers might be problematic as well. The different research units all have their own idiosyncrasies. Mobile operators and other providers of service bundles are not very eager to share information on customers and financial data. Interviewing managers and, or customers will only reflect their perceptions. A multi-method, multi-perspective approach is most likely to give the best results. Although our research knows some limitations, we can conclude from our first exploration of service bundles that bundles normally contain two main types of service elements: core services and complementary services. A core service is a supplier’s main business whereas a complementary service is what makes a core service competitive. Complementary services have the potential to enhance the user experience of a core service. What is core and complementary depends on ones viewpoint on service bundling. Hence, what is seen as core value of a service or service bundle depends on the perspective of providers or customers. The service-related factors show that bundles vary in scope, focus, strategy and composition. The scope of service bundles seems to correlate with the target group chosen. Broad bundles are typically being used to serve the mass market whereas focused bundles are being used to serve niche markets. Most service bundles are defined from a product perspective (pure bundling) rather than from a pricing perspective (price bundling). Some combinations of service elements can be observed more often than others. Typically complementary services, which strengthen each other, are bundled together. Pricing schemes (and therefore the implied revenue models) differ from case to case. One of the most important drivers for bundling is branding. Brand names of vested players make service bundles more attractive for customers. Our technical design issues show that system integration is only seldom being realized. The majority of services are

still offered as independent service. Community services are more integrated and also offer group-management tools. With an exception of community oriented bundles the orientation of the bundles is towards individual use, individual self-management is an artifact from this finding. Bundling of services in the mobile until now is rather traditional: pure, product bundling, in combination with branding by dominant players, real integrated service bundling, with some exceptions in the community oriented bundles, is hardly achieved for the time being. In future research we will focus on further testing of our causal model and use insights from our analysis in order to develop adaptive, we-centric context aware service bundles. It is clear that there is still a long way to go.

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