Business strategy

LEADINGCOMPANY: JANUARY 21, 2013

Vodafone’s pricing backflip: Why do leaders change their minds

Vodafone surveyed 10,000 customers about its plans to change its data pricing, got the nod, and then backed down after pressure from consumer groups. Why do leaders backflip?

Kath Walters

Vodafone has changed its mind. The telecommunications company decided not to introduce new data charges for prepaid customers. It had planned to lift data rates from a per-kilobyte rate to a per-megabyte rate, claiming the price rise was needed to invest in its network, according to newspaper reports.

Network issues – namely limited and unreliable coverage – have been an issue for Vodafone, which has lost 700,000 subscribers since early 2011, according to the Australian Financial Review. However, Vodafone customers are not willing to pay now for better service later.

The backflip is a humiliating one, with the company left looking like it is in a panic and making knee-jerk decisions. Is their sense is their reversal and would they have been better off if they had stuck to their guns?

Under pressure

James Mason, managing director of coaching company, Mindshop, says: “When most people are making robust decisions, they bring in four or factors, and they give different weights to them, and then run their various options through a filter of whether it is good for customers and good for the company.

“With knee jerk reactions, decision makers are more looking at the options directly: what is going to be politically best.”

Paul Harrison, senior lecturer at Deakin University’s Graduate School of Business, says Vodafone’s approach to marketing is unsophisticated, and sales driven rather than focused on service. However he says the whole telecom industry is sales driven and, since customers are locked into long contracts to pay for their phones, the sales focus makes some sense.

“The trade-off for Vodafone is that if it has lots of customers now, it doesn’t matter because they have them for long time,” he says. “Low pricing is a great way to reduce people’s perceived risk. We are always trying to reduce risk and so, if the price is lower but not ridiculously low, we think maybe they are as good as Telstra.”

Modus operandi

This is not the first time Vodafone has backed down on a price hike. Pricing expert, Jon Manning, CEO of Pricing Prophet, says: “They did this before when they were the only telco with no flagfall [minimum charge per call]. They sent a message to all customers saying we are introducing a 25 cents flagfall and immediately saw customers churning. So they sent out another SMS, saying ‘We have listened and we are only introducing a flagfall of only 20 cents’. That was legal price signalling: signalled a change of price to see what their customers and competitors would do.”

Manning says the move to round-up data charges from kilobytes to megabytes is a huge jump (there are 1000 kilobytes in a megabyte); the size of the pricing jump made it difficult to carry off.

The problem with Vodafone’s low pricing model is that data prices are falling fast, says Mason. “In any negotiation there needs to be a win/win, but they haven’t given anything. They seem to be grasping at straws, almost buying themselves time as they ask themselves: ‘Where will we get our revenue from? What is the new model?’ ”

Don’t ask customers

The backlash must have come as a surprise for Vodafone because it completed a survey of 10,000 customers, and they said they would be accept the proposed changes.

Manning, says the market research has let Vodafone down, and is increasingly under question from corporate leaders. “What people say they will do in surveys and focus groups bears no resemblance to what they actually do because the market research industry  has trouble replicating the real buying process,” he says.

Harrison says: “Good marketers never ask consumers directly what they want. People don’t know what they want or need until they have it.”

Instead, clever marketers ask what problems customers need solved, and then introduce product and adapt them and change them as the market responds to them. “If Apple had asked customers what they wanted from their music player, they would have built a smaller cassette player,” Harrison says.

Substitute

Vodafone offers free access to Facebook and Twitter as part of its services, but they decide to rescind this freebie at the same time as upping the data charges. While their data hike has been canned, Vodafone is sticking to its guns on free access – it’s over. Was the whole the play an ambit claim to end the Facebook and Twitter access?

Harrison doesn’t think so. He says such offers are nudges to get customers over the line. “These extra services are peripheral, they are the nudging tool. Most people will buy the same brand that they have in the past, and the price sensitive people will go towards lower price carrier. But most people don’t know when they use their phone, or data they use, so in reality they wouldn’t use those free services. In the overwhelming amount of information people are provided with when they sign a phone contract, if there is a sign at the point of purchase that says free Facebook, it might get them over the line.”

Unpopular decisions can win the day

There’s a strange thing about people and unpopular decisions: we find it hard to maintain the rage. Says Harrison: “There is a theory around expectations that we all tend to imagine life differently from how it is in reality. A classic example is that a large number of people thought world would end when we introduced a carbon tax, but then they just absorbed it into their reality. So, if you pursue a decision, over time people get used to it.”

Manning points to the case of Netflix, a DVD and video streaming company that raised its prices last year, and got a big social media backlash, and lost 800,000 subscribers. But Netflix held the line and discovered that many of the lost subscribers had signed up for free, and its revenue recovered and customer numbers grew.

Trust is the big issue

Although Vodafone has some wins from its decision reversal, it does risk weakening its links to customers. For one thing, when companies win customers on price, it is the low price and not the brand that wins their loyalty, says Harrison.

Mason says that today’s consumers are looking for authenticity and transparency. Having failed to convincingly communicate the reasons for the price rise to consumers, and then reneged, Vodafone’s leadership is building a picture of a company that lacks transparency and does not have real reasons behind its decisions. “The big trend is all about consumer trust and authenticity. If people don’t understand the reasons for the decision, it is a bit like the boy that cried ‘wolf’. And it is wasn’t; the best thing was to admit today we made a mistake, but now what we are going to do is the best for the company and for our customers.”