The Rising Cost of Free

A survey launched today by uSwitch, the price-comparison service, has found that 40% of UK broadband customers are not satisfied with their supplier. This is despite a 17% decline in prices as a result of competition.

Chris Williams, telecoms & media partner at Deloitte, comments:

“The 21st Century appears to be an increasingly benevolent era, particularly within the context of telecommunications products and services. Consumers and businesses are being offered an ever widening range of goods, for a ticket prize of zero.

“This is thanks to a subsidy, often worth hundreds of pounds. Subsidies were a powerful tool during the high-growth phase of the industry, but may have become an expensive and uncomfortable legacy. The cost of this free offer can often include the obligatory purchase of another service (or services); a charge for the privilege of being released from the free service; the cost of calling a premium rate, technical support hotline when the modem that was provided for free proves a nightmare to install, or stops working.

“Telecommunications operators should take a discriminate approach to ‘free’, using it selectively, carefully and with a full and realistic understanding of its potentially negative implications.

“Offering products and services for free can be a powerful tool in high-growth markets, where it can translate into rapid market share growth. But in the maturing telecoms world, the technique may become a liability. There are already numerous examples of free offers turning into public-relations nightmares, and companies must carefully consider the implications of marketing “free”. Not only are consumer groups likely to keep a close eye on the small print associated with free offers, but also competition authorities and regulators may well pay increasing attention, and could even intervene more regularly if the term free becomes over used and misused, particularly in the hands of former incumbents.

“A focus on value and quality may be more sustainable than one based on free. A significant proportion of consumers are likely to remain willing to pay for quality, and by definition, these customers represent the best target for revenue growth for all telecoms companies.

“Using free offers to minimize subscriber churn may hold potential in low-value segments, but only if there is a clear path to revenue growth in the future. This will require far greater selectivity in relation to the tiers of service offered for free (in order to create the opportunity to up-sell to higher-specification, paid-for services), and substantially greater certainty on the revenue growth prospects from other, paid-for services.”