Note 39: Rating Algorithms

Posted: 18 October 2007

Rating Algorithms

There are four key algorithms employed in rating. These are flat rate, tiered, threshold and 'from / to'. Each of these may be applied against different transaction elements to build a transaction's overall price.

Flat Rate, Tiered, Threshold

The first three algorithms (flat rate, tiered, and threshold) are composed of:

A measurable metric used as an index into the algorithm,

One or more threshold levels that allow different outcomes based on the measurable metric, and

Outcomes used in the rating process.

The 'from / to' algorithm is composed of:

The criteria used to determine membership in a 'from / to' category

The qualifying values that describe 'from / to' eligibility, and

An outcome that is then used in the rating process.

The same mechanisms can be used in discounting to determine the discount rate or amount.

Measurable Metrics: A wide variety of quantities, counts and values can be used as measurable metrics, including:

Financial amounts (quantity already purchased of this or another product, revenue billed, property value, prepaid recharge amount),

Non-financial counts (number of active services, frequent flyer points, minutes called, megabytes downloaded, transactions performed), or

The existence of another product (a binary '0' or '1').

If counts and amounts are used, these must be accumulated or tracked ahead of time to avoid performance issues associated with the continuous recounting that would otherwise be required. The need to track specific totals can be linked to, and initiated by, the provisioning of rating/pricing plans that associate customers, their services and the rates that will be charged.

To address specific rating plans, totals may need be collected by service, product, customer, day, offering, bundle, or contract (but due to the processing effort/cost they should only be kept where necessary and useful). The more complex the record keeping required, the more costly the storage and processing that will be incurred, and the greater the scope for error.

Threshold Levels: Thresholds are employed with each being contiguous with its predecessors. That is, there is no value of metric for which an appropriate threshold level cannot be found.

Flat rate: Flat rates effectively have a single threshold used in all cases regardless of any metric's value.

Tiered: Two or more thresholds are used to provide different outcomes for different parts of a customer's total consumption. That is (for two thresholds), the first threshold indicated by zero to 'x' units of metric are processed using one outcome, the next 'y' units (i.e. after the first 'x') are processed using a second (probably different) outcome, and the next 'z' units are processed using a third outcome. This approach allows different rates to be applied to different parts of a customer's consumption.

Threshold: Two or more thresholds are employed in a similar way to the tiered algorithm. The difference is that the outcome selected by indexing the measurable metric against the thresholds generates a single outcome that is applied to the customer's entire transaction / consumption.

Outcomes: Using a metric and the appropriate threshold level, the first three algorithms can be used to determine outcomes such as:

Selecting a basis for rating (flat, tier, threshold) - The selected basis can then be used for rating the transaction itself. e.g. phone call spending up to a lower limit may be charged using a higher flat rate per minute, but later consumption may use the tiered algorithm to support cheaper rates for longer phone calls.

Rates applied against an individual transaction - e.g. cents per minute, dollars per megalitre

Selection of a determinant value - e.g. representing distance

Non-financial resources derived from the transaction - e.g. frequent flyer points

Non-financial resources consumed by the transaction - e.g. 'free' minutes

Discount percentages

Employing the tiered algorithm generates more straightforward processing since it allows the correct outcome to be selected based on what has been performed to date. Future transactions may cause additional thresholds to be crossed, but those outcomes will only apply to the future transactions.

The threshold algorithm operates differently and generates a more complex processing environment. It requires knowledge of the final metric value to correctly select the appropriate outcome before it is applied. If an accurate price against interim transactions using a threshold algorithm is important, an increased measurable metric that results in a different outcome will trigger re-rating to reflect the different outcome now applying. If accurate interim prices rates are less important (i.e. prices are flagged as being 'pending' or 'draft'), re-rating can be delayed until the regular billing cycle.

Algorithm: From / To

The from / to algorithm can be used to explicitly state outcomes for each valid 'from' and 'to' value combination (e.g. tollway entry and exit points), or be used to select subsets of value combinations for special rating treatment (all other combinations defaulting to the appropriate regular rates).

Phone call (from / to): An examination of the originating and terminating numbers can decide whether a specific call is local, domestic long-distance, or international. This process can be refined further by examining the call's destination and charging different rates by country or domestic location.

Tollway journey (entry / exit): The tollway's entry and exit points form specific pairings that describe all the different journeys possible on the tollway. Each possible journey is assigned a rate that is subsequently charged to vehicles. The use of additional determinants such as time (e.g. peak, off-peak), day of week (e.g. public holiday, weekend) and vehicle type (e.g. car, truck) allows the rates to be differentiated further.

Specific point-to-point: The calls between specific services are charged at special (different) rates than would otherwise apply. Examples include customised rates for calls made between a business' offices (e.g. calls may be 'free' or charged at a reduced rate), and calls made between nominated family phone numbers charged at a reduced rate (sometimes referred to as 'Family and Friends').

Member to member: Billers can differentiate their pricing by whether transactions are performed between network members, or outside the network. This has strong relevance in telecommunications networks that can offer cheaper prices to intra-network transactions over those performed between networks. This has benefits for the (telecommunications) biller by reducing payments to other networks, and encourages higher revenue from friends, family and business groups who collectively sign-up to the one network rather than make individual choices to use different networks.

Region to region: Rather than applying between specific services, special rates are applied between broader regional areas. These regional areas can be defined by telephone area codes (e.g. inter-capital city), or other geographic criteria (e.g. postal codes). The same concept could also be applied to transactions performed between services described using non-geographic criteria such as membership of a specific group (e.g. sports club, professional association), or membership level (e.g. gold, senior, corporate).

Algorithm Examples

Flat Rate

Examples where flat rates are used include:

Local calls charged at 20 cents each regardless of duration

SMS or MMS messages with a fixed charge regardless of the data volume transmitted

Tollway journeys between specific entry/exit points charged at a standard (flat) amount unrelated to distance

Bridge crossing fees

Music downloads charged at a rate per song

Monthly recurring charges for network access that do not vary based on network use

Zero rated phone calls included in a monthly charge, but processed (rated) for reasons of invoice presentation

Fixed fee installation charges

Flat rates of 10 cents per minute for phone calls

Tiered

A call duration metric can be used to charge less per minute the longer a long-distance phone call continues. A flagfall can be associated with all calls based on the initial threshold:

First 10 minutes at 20 cents per minute with a 30 cent flagfall

Next 20 minutes at 10 cents per minute

The remainder of calls longer than 30 minutes at 8 cents per minute

Using a metric based on the number of bridge crossings, a tollway can encourage, and charge less for, frequent users:

First 10 crossings at $1 each

Next 5 crossings at 80 cents each

Subsequent crossings at 60 cents each

One product measure can be used to determine the rates of another, in this case to determine a monthly access fee:

Less than 20 local phone calls in a month, an access fee of $40 will be charged

Between 20 and 50 local phone calls, a fee of $30 will be charged

More than 50 local phone calls, a fee of $25 will be charged

To discourage excess water consumption, customers can be charged increasingly more per megalitre:

Less than 20 megalitres, 30 cents a megalitres

Consumption between 20 and 50 megalitres, 40 cents a megalitre

More than 50 megalitres, 60 cents a megalitre

Threshold

A metric of connect time can be used for an international dial-up internet connection to charge differently based on the time spent connected:

Connections of up to 30 minutes at a flat rate of $10

Connections of between 30 minutes and 60 minutes at a flat rate of $20

Connections of longer than 60 minutes charged at a flat rate of $20 plus a variable $1 per minute (in excess of 60 minutes)

With a metric based on bridge crossings, a tollway can encourage and charge less for frequent users. Using the threshold algorithm, the bridge crossings will cost the lower rates from the first crossing, whereas using the tiered approach the cheaper rates only apply for each incremental crossing:

Up to 10 crossings performed in a month, $1 each

Between 10 and 20 crossings performed in a month, 80 cents for all crossing

Customers performing more than 20 crossings, will be charged 60 cents for all crossing

Prepaid mobile phone calls charged at rates that vary depending on how the prepayment was performed. A customer recharging a higher amount into their prepaid balance (i.e. the metric is based on the recharge amount rather than their current or subsequent balance) will receive cheaper phone calls:

Recharge amount of $10, calls charged at 60 cents per minute with a 20 cent flagfall

Recharge amount of $20, calls charged at 55 cents per minute with a 15 cent flagfall

Recharge amount of $50, calls charged at 50 cents per minute with a 15 cent flagfall

Recharge amount of $100 or more, calls charged at 45 cents per minute with a 12 cent flagfall

Non-financial Resources

Non-financial resources are counts and quantities kept within the rating and / or billing systems that are used to influence rating outcomes. These resource totals can be used as metrics by the rating algorithms to select different rates, or appear on the customer's bill to indicate quantities remaining ('free' minutes of phone calls) or accumulated (frequent flyer/buyer points).

Accumulated resources may accrue at different rates for each product, or be depleted for specific products only (e.g. SMS, local phone calls). Resources counts are maintained independently of one another both within a customer, and between different customers.

Resources can be maintained by a wide array of billing processes including:

Provisioning: Counts of active services would be incremented or decremented as part of the provisioning process.

Service establishment: One-time totals may be set when a service is activated - e.g. 'free' introductory offer of 100 minutes of long-distance phone calls.

Billing Cycle: Resources may be reset to zero or updated to the (say) monthly quantity included within a rate plan. Each rate plan may have different reset totals, and can have resource expiry dates (i.e. use it or lose it!). Some rate plans may allow some resources to be carried (rolled) over to subsequent billing cycles / months (i.e. delayed expiry).

Calendar based: Similar to the billing cycle, resources may be reset on a calendar basis (e.g. 300Mb per calendar month). This approach is more tolerant of delayed billing cycles, and can be explained to customers more easily.

Customer-wide consumption: The number of local calls made by all of a customer's services may be accumulated in one resource total.

Tags: Billing, Rating Algorithm, Rating