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Note 85: Using Bundling and Differential Pricing

Bundled Pricing

Bundles are collections of products and/or services offered to customers at a lower price than the sum of each item offered separately. Even when customers don't need or use all of a bundle's components, customers may find enough collective value in a bundle to purchase it over separate a la carte purchases of its components. Components in the bundle undervalued by a customer can still provide some benefit as a customer can optionally use them 'for free' (since they have already been paid for). Without the bundle, customers are likely to spend less money on only the specific components they value.

 

 

Grouping products and services together and charging less for them, can help bind customers to a biller and reduce a customer's benefit from purchasing each product or service individually from other providers. If a customer cancels a bundled product or service they may 'break' the bundle's pricing arrangements and thereby spend more paying for each product and service individually (i.e. a la carte).

For example, a telephone company may offer a bundle discount when customers purchase all their fixed phone, mobile phone, cable TV and/or internet services from the same company. The discount applied may depend on the number of services a customer bundles together. In this example, the discount for the increased business is reduced or removed when customers cancel one or more services and spend instead with other providers.

Bundles increase the complexity of billing because individual services (and their pricing) must be billable along with each allowable bundle combination (each with its own pricing). Discounts may be used to reduce a customer's costs, or lower rates may be used when a bundle is in force. The pricing can include one-time charges such as installation fees, recurring charges such as access fees or network features (e.g. caller-id), and network usage such as phone calls and downloaded content (weather, music, ringtones).

Another example of bundling is a cable TV provider's 'basic' bundle that includes a base number of channels at a fixed rate per month. Whilst not all customers value sports, news, movies and children's channels, each customer (hopefully) finds enough value within their areas of interest to purchase an ongoing cable TV subscription. In this example, bundles reduce billing complexity over the alternative of allowing each customer to select their own choice of the available channels. Compared to the complexity of a short selection of bundles, the billing systems required to support the selection, pricing, billing and reconciliation of each customer's individual channel combinations would be too complex and expensive to manage even a moderate cable TV business.

Quantity discounts can provide benefits similar to those of a bundle. DVD rental businesses such as Netflix in the US offer subscription billing that varies by the number of concurrent DVDs a customer may borrow at once. For example, customers may borrow 3 at once for $18/month, 4 for $24/month, 5 for $30/month. Customers can self-select the number of DVDs (i.e. bundle) appropriate for their situation.

Differential Pricing

Differential pricing tries to collect different amounts from separate market segments for the same (or similar) products and services. Differential pricing does this by using a customer's willingness/ability to pay and their perceived value of what is being offered. A classic example of differential pricing is an airline seat conveying a passenger from point A to point B. The product is exactly the same, but the different ticket conditions and purchase timings allow airlines to charge business passengers a premium (for tickets purchased at short notice with the ability to change flight times) and give discounts to tourists (who purchase weeks in advance and are firmly locked into specific flight times).

Using this pricing approach helps airlines extract the most revenue from each flight across a wide variety of market segments.

Billing can charge different amounts for products and services by varying the conditions that apply to each offering. Examples include:

  • Utilities might charge higher monthly access rates for their power / gas / water connections if service restoration and maintenance were performed with a higher priority.
  • Tollways could construct offerings that charge customers less for journeys performed in off-peak hours (when customers might choose side roads instead) and charge more for peak-hour journeys (when each additional car adds to the congestion).
  • Stock market quotes offered live at a premium price, and at a reduced rate for quotes delayed by 15 minutes.
  • Digital Rights Management: digital offerings constructed with different combinations of play and retention rights charged at different prices.
  • Telephone companies offering phone services which trade-off the monthly access fee against the cost of phone calls - the higher the monthly fee, the lower the call costs. (Note: A competing pricing choice could charge customers with high call volumes (e.g. businesses) a cheaper rate for their monthly access.)

Billing may use the determinants set elsewhere in a biller's network to select a transaction's appropriate rate. For example, individual music tracks downloaded from the internet might be offered at different quality levels. The music delivery system could flag the transactions sent to billing as being high, medium or low quality recordings, and billing could charge different prices for the same product (music track).

Time To Market - Responsiveness

Billers may operate multiple business systems that must know the correct pricing information to deliver accurate customer communications and bill processing. As the number of separate systems that must be updated and replicated increases, a biller's responsiveness to competitors can be impaired. Billers must be confident that all locations in a heterogeneous environment have been updated in a timely manner to avoid the correction costs required to remedy errors. For example, a product's price and conditions may be referred to by a biller's staff when answering customer inquiries, on the biller's website in a list of all products offered, in the rating function of the billing system, and possibly in the network itself.

Billers can be more responsive when all of these locations make reference to one location, or for performance, a master copy is promptly copy-managed to a small number of discrete repositories. It is desirable that pricing details are centralised out of the network to avoid the need to accurately update thousands of locations. For example, telephone networks once rated calls at each exchange necessitating manual adjustments in each when prices changed, but now calls are passed to a central application that rates calls based on centrally maintained rating tables.

Price Comparisons

Billers may use the details of the alternative offerings from their own and their competitors' catalogs to validate customers are receiving the 'best deal possible'. This can be done retroactively using a customer's historical consumption and activities, or proactively when choosing the appropriate pricing plan at service connection. Details of a customer's expected consumption can be captured and fed into a 'what if' process that calculates the comparative costs of different plans. This can be used to demonstrate the (hopeful) benefits of a biller's plans over their competitors, or choose a pricing plan that costs less than the customer's current selection.

Backdated Reprocessing

Occasionally, billers need to recalculate historical charges when backdated changes are made to pricing plans. These changes may be required due to errors discovered in the billing system's configuration, processing errors in the software, a regulator's declaration of modified rates, or retroactive rates applied against a corporate customer's contract.

The recalculated prices may be to the customer's benefit, but they can just as easily be to the biller's. Decisions about what to do when customer's have been asked to pay a lesser amount must be made on a case-by-case basis with an eye to the customer's perception of the biller.

The complexities involved in performing these historical recalculations may justify billers making a commercial decision to estimate the result and make block credits to their customer's accounts. The estimation process can err in the customer's favour and may avoid the costs associated with an absolutely accurate answer that varies only slightly from the estimate.

Backdated reprocessing generates execution problems in at least four areas:

Data availability: The necessary data required to perform accurate reprocessing may not be available (deleted), or may not contain the detail available in the original records. For example, records of phone calls from the network will include many more dimensions that those presented on a customer's bill.

Transaction volumes: Depending on the scope of the retroactive changes, a biller's entire customer base may be affected, their most popular product (e.g. local phone calls), and / or their largest customers (e.g. retail corporate, wholesale reseller). This quantity of data may exceed the space or processing capacity available on the biller's production platform, and, if archived, may encounter delays as it is retrieved.

The dimension of time: Originally, charges will have been calculated based on other customer values present 'at the time'. Customers receiving cross-product rates may need multiple product totals recalculated to accurately rerate the errored products. End-of-month may reset certain totals, or customers may recharge their prepaid balances, and the correct order of each event may affect the rates that apply.

(re)Processing location: Billers provision their production environment to address 'normal' processing with a margin for growth and 'busy' days. The recalculation of historical processing can challenge a biller's production processing environment that must address ongoing production whilst performing the recalculations.

Performance testing environments might be an alternative location available to some billers, but these may present other challenges associated with connecting and relocating the necessary customer and transaction data to those locations.

Delivery of results: Once calculated, the results of the recalculation must be tested for accuracy, conveyed to customers and retained to justify the changes to financial postings. Billers must decide whether the original charge is withdrawn and replaced with a corrected transaction, or a nett credit (debit) is provided instead. The customer's bill will need to present the results of these decisions along with descriptions and reference details (e.g. problem number, credit voucher details). The details displayed may require additional paper (or electronic) documentation sent along with the customer's next bill to explain what has happened, and the biller's customer service staff must know what to do when customers ring with questions.

Recommended References

  • 'Information Rules: a strategic guide to the network economy' by Carl Shapiro and Hal R. Varian, HBS Press, 1999, ISBN: 0-87584-863-X
  • Andrew Odlyzko - 'Internet pricing and the history of communications' (Director, Digital Technology Center, University of Minnesota / ADC Professor; Assistant Vice President for Research; Professor of Mathematics)

Originally posted by

- 20 July 2014

 

 

Links to other Notes

Previous: Billing Business Practices Implemented Through Pricing

Next: Explaining The Dispute Lifecycle


 

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Recent Posts on purebill.com

» Processing Disputed Charges - Whilst most bills are accurate and accepted by customers, some customers will want to query or contest the charges appearing on their bills.

» Using Bundling and Differentiated Pricing - Using bundling and applying different pricing by market segments, billers can realise the most for their products and services.

» Business Practices Implemented Through Pricing - The price billers charge for their products can influence customer's consumption behaviour by increasing or decreasing their likelihood to purchase.

» Billing Pricing Models: Explaining Customer Impacts - Biller’s decisions about how they charge for their products and services result in pricing models that influence both a biller’s processing complexity and customers' behaviour.

» Billing Addresses - A billing application uses addresses in a wide variety of roles to describe the source locations of incoming transactions (from the network), details about the customers (and their representatives) who are billed, and the destinations to which the outputs from billing will be sent.

» Using Taxation Details Within Billing - Where governments tax the business domain being billed, the billing system will be a key calculation point since taxes are likely to be calculated on the finalised amounts after all rating / pricing has been performed, and after any discounts have been applied.

» Fraud Detection: Using Called Numbers To Find New Targets - Fraud occurs on phone networks, and when detected, it is closed down and stopped on the phone numbers on which it was detected. But how can the same bad actors / fraudsters be detected if they start up on new fraudulently obtained phone numbers, or have other existing phone numbers on the same network?

» Using Billing Notes and the Contact History - Billing applications make ‘contact’ with the biller’s customers each time a bill or reminder notice is sent, and whenever customers ring or email the biller’s staff with billing-related inquiries and requests. A billing note is one mechanism for capturing the key details of these customer / biller interactions. When a customer contacts the biller subsequently, the biller’s staff can review the customer’s prior contacts by looking at the notes that were recorded.

» How Does Payment Allocation Work? - Payment allocation is the association of credit amounts, such as new payments and adjustments, against a customer's outstanding debts (e.g. unpaid bills / invoices). There are different approaches for allocating credits against the customer's outstanding debt(s).


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Stephen Jones

Stephen Jones is a consultant who has focused specifically on Billing and related processes for over twenty years. Recent work has included relating a major telco's billing with inbound call centre logs for Call Centre Analytics.

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I contributed an essay on testing design assumptions in the O'Reilly book 97 Things Every Software Architect Should Know. This book was written in an 'open source' style with more than four dozen authors. The original essays of the axioms / koans / advice can be viewed on the project's wiki.


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