Impact of sensitivity and iterative calculations on cost-based pricing

When introducing a new telecom service it is very important for the operator to set the tariff right. Being too prudent by setting the tariff too high will most probably put the operator out of competition. On the other hand, setting the tariff too low might skim profits, lead to cannibalization of other services, forcing the operator to raise the tariffs - which clearly has a negative impact on the user satisfaction and coupled market share. Current telecom networks make progressively use of an all IP network, in which all services run over the same infrastructure. While this move allows reducing costs due to economies of scale and scope, it disguises the costs of each of the different services within the full costs of the network. As the tariff is expected to be sustainable in the long run, the costs associated to the roll-out of the new service should at least be covered by the (forecasted) revenues. Different allocation schemes can be used for discovering the costs associated to each of the services over the network, and their use leads to a better understanding of the margins on sustainable tariffs as opposed to stand alone or break even calculations. The whole calculation is largely dependent on the forecasts of adoption, bandwidth growth and cost evolution. Within this paper we will first investigate the sensitivity of the calculated tariff margins on changes of these inputs. In a second phase we will investigate what impact the calculated tariff margin might have on the adoption of the service. We also indicate that there are important changes to these margins when quantifying this impact and using iterative calculations.