StrategyStreet / Blog / Basis of Charge




The Basis of Charge

Every price has at least two components: a set of performance benefits associated with the product and a unit price. The unit price is what we call the basis of the charge. This basis is the unit measure the company uses to quantify the price for the product. When you change the basis of charge, you usually change the effective price at the same time. Normally, the basis of the charge, or unit price, expresses a major cost that the supplier of the product incurs. A trucking company charges by weight. Lumber sells by dimension. Gasoline sells by a volume measure. Paper sells by weight.

Sometimes prices in a market are high enough that the suppliers don’t worry too much about their cost structures. (See the Perspective, “What Makes Returns High?” on StrategyStreet.com.) One example is the provision of internet services.

Not too many years ago, AOL, CompuServe and others charged internet users by the minute that the user was connected to the internet. But profits were high in the industry and the growth rates were impressive. Competition forced a change in pricing by changing the basis of charge. Instead of charging per minute of connect time, the industry moved to a flat rate monthly charge. This basis of charge allowed the internet user customer to use all the bandwidth he wanted for this flat rate. This made sense as long as industry profits were very high.

The industry evolved in ways that the early providers did not anticipate. Now the heaviest users of the internet use enormous amounts of bandwidth to download movies and other data. These heavy users are putting a strain on the network capacities of the internet service providers. Costs for some heavy users exceed the revenues they provide under flat rate pricing.

So there is a change coming in future pricing for internet usage. The single flat rate is about to give way to a basis of charge where the speed of the connection and the total usage of bandwidth are considerations for arriving at a price. Pricing is returning to a cost-based basis of charge under the weight of competitors.

AT&T is testing a new pricing approach in selected markets. Its lowest cost offering runs at $19.95 a month. It provides a speed of eight-tenths of a megabit per second with an overall monthly limit on downloads of 20 gigabytes. At the high end of the spectrum, the monthly price jumps to $65 for a service that offers a speed of 18 megabits per second and a monthly cap of 150 gigabytes.

This new AT&T pricing illustrates the shift from the pricing in a young, fast-growing industry, where costs seem less important than customer acquisition, to one where costs of the product become a differentiator of both the attractiveness of the customer and the efficiency of the supplier. (See the Symptom & Implication, “Revenue growth has been high, but has slowed” on StrategyStreet.com.)

Posted 10/29/09

Comments

You are not allowed to create comments.