Note 22: Using determinants in pricing

Posted: 09 February 2007

Recurring and Non-Recurring Charges

Recurring and non-recurring charges are used to represent non-network charges. This means the network determinants available to network usage are not available for these charges. This unavailability means that non-network charges are relatively 'two dimensional' when compared with the variety of determinants available to 'three dimensional' usage charges.

These non-network charges can only use two areas to obtain their determinants: customer data (demographics) and marketing (product offering) information. In addition, the intrinsic properties of these charges makes them less interesting. For example, non-recurring charges apply at a particular point in time (usually date) and don't have a duration. For a recurring charges, once the rate has been determined it is common practice to apply the same rate for the recurring period's entire duration without varying it by 'time of day' or date. This provides fewer opportunities to vary / differentiate the charges levied.

Network Usage

Usage has more determinants available to drive differentiation in its pricing. The additional network and transaction details allow each usage charge scope to be priced individually.

The additional information available in a usage transaction also allows more than one usage dimension to be charged for. For example, a dial-up internet connection can be charged for based on a combination of both the time connected and the data (megabytes) downloaded. The prices for these two dimensions can be calculated separately before being aggregated to form the usage transaction's total price.

The additional usage determinants are also used in explaining a customer's bill, and enable the customer to confirm how the charges' prices were determined. For example, an invoice line that says 'Phone call - $1' provides little opportunity for the customer to confirm the entry's validity. An alternative invoice line that says 'Mobile phone call on 16th Sep 20XX to Hong Kong at 6:15pm (off-peak) to number 555-1234' provides a much richer customer interaction.

Transaction rating uses determinants to assign a price using one of many possible options - indeed the individual acts of usage (e.g. tollway journeys) may be charged for under a collective usage charge (e.g. a daily tollway pass).

Usage determinants that may be provided by the networks include:

Tollways: bridge name/identifier, journey from/to, daily pass (on a specific date), vehicle type (truck, car), journey time (peak, off-peak, weekend)
Utilities: peak/off-peak (electricity), renewable / coal-fired (electricity), uninterruptible supply (electricity), drinkable supply versus sewerage (water)
Telecommunications: network type (mobile, fixed), number type (premium, standard), destination (country), content type (song title, movie, pay-per-view event)
Government rates / taxes: building type, zoning

The biller is dependent on the network to supply these consistently and correctly. If only part of the biller's network can provide the required fields, or they cannot be trusted, then they should not be used. The impact to the customer relationship, and the costs associated with unraveling and explaining what has happened with each customer, are likely to exceed any financial benefit the biller achieves.

The available information drives how the biller's charges can be constructed. The determinant and transaction information must be present for pricing options to be viable. If the intrinsic information is not available then no amount of wishful thinking will enable them from thin air.

Charges built from the sum of their parts

The example of a dial-up internet connection (with charging based on a combination of time connected and the data downloaded) outlines how the total price of a charge can be based on an aggregation of parts. The design of the biller's charging approach is limited only by regulation and the contract terms that can be struck with customers. A wide variety of non-recurring charges can be developed for the installation process. Product design is a process that looks at, amongst other things, the available determinants, invoice presentation requirements and customer preferences.

Where a charge total is built from separately calculated components, the calculation approach taken for each component can be different and independent. For example, the dial-up internet example could be modified to apply a fixed charge each time a connection (of any duration) was performed, but retain the variable charging for data downloads.

Invoice presentation is an important part of the billing process as it provides a level of information that allows a customer to understand and confirm their invoice. Supporting this process means that each charge component used to price a charge may be required for invoice presentation. In the dial-up internet example, the invoice line item displayed for an internet connection may include details of the date and duration of the internet connection, quantity of data downloaded, and the component price amounts associated with each.

An example for non-recurring charges could be for an electricity connection (installation) performed with raised priority. If a determinant indicating priority is used, there are at least three charging alternatives available to the biller including:

Charge the regular connection fee only: Ignore the determinant and charge based on the connection transaction only. This approach is not recommended since every customer would soon ask for priority connection.

Charge the regular connection fee plus a priority surcharge: This uses the priority determinant to calculate a surcharge amount that is added to the regular connection fee. The separate calculation of these two amounts enables them to be modified independently, and, if they are carried through the billing process, provides scope for them both to appear on the customer's invoice.

Combination: Combine the existing connection determinants and the additional priority determinant to calculate a priority connection fee. This approach uses the additional information available in the transaction to determine a single fee amount equivalent to the regular fee amount plus surcharge outlined above. This approach is no less acceptable but there are two observations to note. The first is that since the fees are combined, any change in the 'surcharge' or 'connection' fees (or the addition of a third fee component) results in every combination requiring maintenance. The second is the lack of information showing the fee break-up for presentation on the customer's invoice.

In deciding a charging approach, the biller must live with the costs and limitations of each choice. However, the approach taken for each charge, charge type and product offering can be different and change through time. This allows the biller to migrate from choices that limit available market offerings, or respond when competitors change their billing model.

Tags: Billing, Determinants, Rating, Pricing