Do Wrong Tariffs Cost UK Consumers $9bn?

Perhaps we should congratulate the revenue maximizers who work for UK telcos, because the BBC recently reported that they generate an extra GBP6bn (USD9bn) every year, because their customers are on the wrong tariffs. Good work chaps! That equates to roughly GBP100 (USD150) a year from every man, woman and child living in the UK. £6bn is more than double the £2.34bn raised by the UK government’s auction of 4G spectrum, and is about 0.4% of the UK’s GDP – which is not bad, considering the country is forecasting growth will be 0.6% in 2013. And all these billions are collected because customers are on the ‘wrong’ tariff. In other words, the telcos are making this extra money in exchange for nothing. That sounds like the inverse of a revenue leakage to me. Net that off against the last leakage report, and you can all go on vacation for the rest of the year. But do we believe it? Or was this an early April Fool’s joke from the BBC?

For their article, the BBC relied heavily on billmonitor, a website where people compare their existing spending to what they would spend on other tariffs. In their 2012 report, billmonitor concluded that GBP4.32bn was wasted on tariffs with allowances greater than the user needed. A further GBP1.66bn was wasted because consumers had insufficient allowances for their needs, causing them to spend more on usage. When confronted with that kind of analysis, there is only one answer: duh. You might as well argue that anyone buying insurance, but not making a claim, must have wasted their annual premium. If customers want to constantly review their tariffs, to ensure the allowances perfectly match their use, then that is up to them. Most people have better things to do, like constantly changing their bank account to get the best interest rate, constantly changing their electricity provider to get the best price, and constantly monitoring their calorie intake to avoid being fat. Or maybe they have even more important things to do. Like going to work, sleeping, making babies and raising children. The fact that consumers ‘waste’ GBP6bn by not checking their tariff, tells us something about their priorities.

According to the UK regulator, total UK telecoms revenues are GBP40bn (USD60bn). This means that billmonitor has identified ‘inverse leakage’ worth 15% of telecom revenues. (If leakages involve supplying something but not getting the money in return, then getting money for supplying nothing would be an inverse leakage.) Is this believable? I think it is. And whilst the 15% estimate is derived from UK telecoms data, I expect it is a useful starting point for understanding how sub-optimal tariff choices will boost revenues in other countries. To my mind, I can perfectly understand why some customers prefer to have a large allowance and the confidence to use their phone whenever they like, whilst knowing their bill will be predictable. Even an ‘eat all you want’ plan could give less than the optimal economic return, if you do not eat that much. But that does not mean we go to the pizza parlour and make ourselves sick just to get the maximum return from an ‘eat all you want’ buffet. Billmonitor may call it ‘waste’, but everybody puts a value on their time, and this 15% variance measures how British customers spend their time doing other things, instead of optimizing their phone bill.

I find this 15% of inverse leakage interesting because it puts into context the fuss that is often made about telecom efficiencies and accuracies. Billmonitor is approved by the regulator and claims to have checked over 2mn bills since 2009. If billmonitor’s numbers can be trusted, then UK telcos generate 15% of their revenues from customer apathy and ignorance about usage and tariffs. Whilst that is no reason for telcos to waste their own money, it highlights that revenue maximization is not just about crunching data to calculate what is optimal. No amount of data is helpful, unless it is used to understand how real people behave, and human behaviour cannot be reduced to crude calculations about optimal returns.

More importantly, a lot of what is written on billmonitor’s site, and in the BBC’s article, is misleading and encourages customer ignorance. I am not disputing the 15% variance that they present, and which they crudely refer to as ‘waste’. Both the BBC and billmonitor argue that people may not correctly understand their data usage. Duh. Of course people do not understand their data usage. But the problem is not restricted to how many bytes people use, compared to the size of their allowance. The problem is that the same user experience, on a different network, using a different handset, will consume a different number of bytes. Customers pay for services because they want to watch a video, send an email, browse a website, update their Facebook profile or download a document. They have no knowledge of how the ‘same’ experience may consume different numbers of bytes, depending on the network and handset. To use an analogy, when we buy a car, we might check the stats on its fuel efficiency. There may be a variety of stats relating to whether the car is driven around the city, or on the motorway. These fuel efficiency indicies give us a very rough guide of how much fuel the car uses, and help us to understand the total costs when we use the car to satisfy real, human goals – which may be the commute to work, or a visit to see Aunt Mabel. Checking a phone tariff and allowance is like comparing fuel prices. It tells us nothing about the relative efficiency of our car, as relevant to the roads we drive it on. As a result, we have no point of view on whether we have an inefficient handset, or if we drive it through the internet’s least efficient highways. These factors are also relevant, if we want to understand the efficiency or wastefulness of customer behaviour. However, that kind of efficiency comparison would be complicated, which is why the BBC and billmonitor are too apathetic to discuss them!

Let me wish you a happy April Fool’s day. We work in an industry which maximizes revenues because customers do not check their tariffs. And we have no idea how wasteful or efficient data services really are, because we do not really compare user expenditures, relative to the experience they wanted and purchased. But we work in an industry with lots of data, and we talk about optimizing and maximizing everything. Is the joke on us?

Eric Priezkalns
Eric Priezkalns
Eric is the Editor of Commsrisk. Look here for more about the history of Commsrisk and the role played by Eric.

Eric is also the Chief Executive of the Risk & Assurance Group (RAG), a global association of professionals working in risk management and business assurance for communications providers.

Previously Eric was Director of Risk Management for Qatar Telecom and he has worked with Cable & Wireless, T‑Mobile, Sky, Worldcom and other telcos. He was lead author of Revenue Assurance: Expert Opinions for Communications Providers, published by CRC Press. He is a qualified chartered accountant, with degrees in information systems, and in mathematics and philosophy.