Aggressive competition in the mobile market is placing increasing pressure on operators as ARPUs continue to decline. Operators have been looking to non-voice services to counter falling revenues, but what strategies are being used to increase voice ARPUs?

In highly competitive markets, raising voice tariffs is not an option, so operators must look for innovative strategies aimed at encouraging people to make more – and longer – revenue-generating calls, particularly during offpeak times when little incremental cost is incurred.

Vodafone notes, in its 2006 annual report, that its European customers use their mobile phones for an average of just four minutes per day. While average minutes of use (MOU) for some operators – such as TeliaSonera Finland and O2 Ireland – is quite high, usage levels for Vodafone’s European customers are not unusual (Exhibit 1).

Exhibit 1: Average monthly minutes of use (incoming and outgoing) per subscriber for selected operators [Source: operators' financial reports]

Average mobile call duration tends to be quite short, as people typically keep calls brief due to the perceived high cost of long calls. In Japan, 61% of calls are less than one minute, while average call duration in several European countries is typically less than two minutes (Exhibit 2).

Exhibit 2: Average duration of outgoing mobile calls in selected countries [Source: regulators]

So what type of initiatives are being adopted by operators?

Bundled packages for both contract and prepaid services may include generous usage allowances that encourage customers to make more calls, although the average price per minute is reduced. Such packages however are likely to increase traffic during peak times, and result in higher costs for the operators if network capacity must be upgraded to cater for the additional demand.

One common strategy is to offer reduced tariffs for calls between a nominated group of mobile numbers. So-called “family and friends” options generally apply only to on-net calls (for example the BestMates plan from Vodafone New Zealand), but some plans (such as O2 UK’s Friends) do not place any restrictions on the user group. Calls within such a user group are more likely to be during evenings or weekends, and so less pressure will be placed on peak network capacity.

In the United Kingdom, Vodafone offers two tariff options which both aim to increase usage (and hence ARPU). Both are available at no additional charge on an opt-in basis.

Vodafone UK’s “Stop The Clock” is available on prepaid as well as contract plans. During offpeak times, the user pays only for the first three minutes of the call, plus – if the call exceeds one hour in duration – for any usage in excess of 60 minutes. The objective therefore with Stop The Clock is to remove potential barriers to lengthy calls. The success of this option in the UK has led Vodafone to introduce Stop The Clock in some of its other markets, including Malta and the Netherlands.

Vodafone UK’s “Free Weekends” rewards prepaid customers with free texts and/or calls for the following weekend if they achieve a certain minimum call spend during weekdays. A call spend of GBP2.50 enables the customer to send free texts, while a minimum spend of GBP5.00 gives both free calls and free texts all weekend. This therefore seeks to stimulate usage by encouraging the customer to achieve the minimum spend levels. In October 2007 Vodafone launched Free Weekends in New Zealand.

New customer offerings from Vodafone UK, including the above options, in conjunction with price reductions, resulted in a 16.7% increase in outgoing voice usage – faster than the increase in subscriptions which grew by 6.8% (for the financial year ending 31 March 2007). Note that although Vodafone is the only third largest operator in the UK based on subscriber numbers, it is the leader in terms of both total revenue and ARPU.

The success of any tariffing strategy will depend upon the market characteristics, including the traffic patterns and the offerings of competitors, as well as the objectives of the operator. A strategy that has proved successful in one market may not always be appropriate for a different market. In particular, innovative approaches are required to tailor strategies that achieve increased revenue but with minimal effect on costs.