Oh, that's cheap. Or: how to increase ARPU as a mobile provider

This topic might feel a bit “off topic”, as it is not very personal to me, but it resulted from a posting I made at gutefrage.net, a Q&A platform where you can answer random questions, hopefully in your own field of expertise. And since I love feeling superior (and miss answering questions in my holidays a bit 😉 ), I started posting there.

Simyo – a German prepaid discounter –  has started offering 39 EUR all calls/messages/data transfer “flatrates”. Sounds cheap, eh? But why would they do that and where’s the catch?

The German mobile telephone market is again changing. When I had my first mobile phone back in 1998, there were only three network operators on the market and prepaid offers were virtually not available. You signed up for a 24 month contract with a base charge and got a subsidized mobile phone. Over the years, things evolved and in the last couple of years, a few trends emerged on the market:

  • Subsidized mobile phones linked to long term contracts with a base charge are not that popular anymore. Instead mobile phones tend to be bought with a one-off payment or through installments.
  • Having no long-term contracts to get a mobile phone and the general avaliability of (older) mobile phones in the market empowered pre-paid contract-free SIM only deals. There are many discount providers with a “no frills” policy on the market, offering significantly cheaper rates than the well established mobile network operators with their post-paid contracts.

Of course lowering the price lead to an ever-falling average revenue per user (ARPU). While the ARPU used to be roughly 25 EUR per month in 2003 (http://www.heise.de/newsticker/meldung/O2-steigert-Kundenzahl-und-Umsatz-pro-Nutzer-81037.html) it dropped down to around 14 EUR per month in the last couple of years. (see http://www.de.o2.com/ext/o2/wizard/index?page_id=16705;tree_id=1576;message_id=3121). Interestingly enough, while the post-paid ARPU stayed at roughly 25 EUR per month, the average pre-paid ARPU dropped to below 7 EUR per month.

To gain back revenue, providers started offering flatrates to higher the ARPU. When they started with the all net flatrate, it was about 80-100 EUR per month. Now they’re down to 35-39 EUR per month for data, text messaging and phone calls all around Germany, and this is not a fixed fee, but rather a cost cap when the 39 EUR are reached.

Of course it is interesting to analyze why and how they do that. 39 EUR is cheap. But if you take a closer look at this offer (e.g. the one from Simyo) you’ll find out that you end up paying 0.24 EUR per MB data traffic. This equals 160 MB of traffic and is easily reached if you use a smartphone. So the providers’ intention is most likely not to give you a cheap service, but to make you spend as much of the 39 EUR as possible per month and hence increasing their ARPU.

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