12th March 2015

Telcos and the Market for Lemons

In 1970, George Akerlof published 'The Market for Lemons: Quality Uncertainty and the Market Mechanism’. Its central thesis focused on the used car trade in America; when consumers are ignorant of certain aspects of a used car, such as its maintenance schedule or its accident history, they are forced to make choices based on the limited information they do know, such as the brand or colour. Variables irrespective of quality. It’s a market of 'information asymmetry', according to Akerlof, where one seller has superior information over another. It’s why when customers find it too hard to distinguish a cherry, they'll choose a lemon instead.

In the telecommunications industry right now, lemons abound. Confusing, incomparable, and varying tariffs discourage customers from easily comparing mobile contracts – leaving them with little choice but to focus on simpler items, like brand of phone.

Inherent Complexity

Mobile phone operators have long struggled to provide customers with clear information, despite knowing what the majority of their customers need and want. Many of our experiences are characterised by price propositions with complex combinations of charges and allowances, leaving customers with little understanding of the overall costs of their service. It’s little wonder then that 1 in 6 people have received a higher bill than expected. Of those who had received a higher bill, 79% stated that they needed more information on the cost of out of allowance calls.

This widespread confusion is not a grand conspiracy between companies, taking place in shadowy back rooms. Much has to do with the inherent complexity of telco itself. Often their underlying infrastructure is so complex, even the best user interface couldn’t make their price plans truly easy to understand.

Mobile phone contracts are also what are known as experience goods — goods that possess certain features that cannot be observed by the customer upon purchase, and can only be learned through experience. Customer service is one such feature; an operator knows in advance the quality of the service it provides, but it is difficult for the consumer to observe its quality without direct experience.

Deliberate Strategies

But there are also deliberate strategies to present information about prices in unnecessarily complex ways. For example, partitioning prices into direct fees and indirect and involuntary surcharges. Or product bundling, wrapping up products like broadband and phones into one package.

These strategies make understanding prices more challenging, by placing the responsibility on the consumer to appreciate the various price components and calculate the actual price of the product. This gradually heightens the search costs — the costs customers have to incur to gain information about the services on offer.

With mobile operators burdened with complexity, and with many consumers in a perpetual state of confusion, telco companies are in a surprisingly stable position. Despite having been dis-intermediated several times, technology has been unable to disrupt the foundations of telco. Despite more and more trains, they still own the tracks.

But in a market of lemons, where customers are unsure of quality and, accordingly, become reluctant to pay any more than an average price, the danger is not in being replaced, but in prices levelling down to the bottom part of the price spectrum, something we’ve already seen happening in the U.S market.

People over pipes

The real opportunity for telco companies to remain competitive is in closing the information gap between customer and business.

To understand how this can be achieved, let’s go back to telecommunication basics. Telco is a market in information. They exist as an information bridge between those with something to say and those willing to receive the message and have played that middle-man role, more or less uninterrupted, for the better part of 200 years.

The mediums that have carried the messages have changed but whether it’s an semaphore or an SMS, the job is the same — to communicate information from one person to another.

What’s required for telco is to shift their strategy towards one of people over pipes

It should become less and less about the infrastructure that underpins telecoms, but more about how they can help customers do the things they want — communicate.

Over 80% of operators measure customer satisfaction in terms of network performance and 40–45% in terms of quality of customer service. – Livework

Helping customers communicate is not something telco has been particularly good at over the years. Customer service satisfaction indexes put telco well below the all-sector average, with over 23% of customers experiencing a problem with their provider. What’s more, customer service is increasingly pushed down the self-service route, placing the responsibilities on customers to solve their own problems.

This lack of customer focus is felt especially at key points in the customer lifecycle. For example, take onboarding customers, a core skill of customer service that’s almost unheard of for telco operators.

For web app companies, onboarding customers is seen as an opportunity to proactively prevent the need for support before it’s required. Rather than simply handing you a pile of bricks, you’re provided with a bucket and spade to help you get started.

For telco companies, this could mean that during the first weeks of a customer signing a new contract, an operator could train customers in services that are difficult to understand or setup, such as monitoring your usage.

Or an email could follow your first bill, to help you understand the breakdown of charges.

Or a message offering you a more suitable price plan if you’re constantly exceeding your limit

None of this is groundbreaking. But done well, the result of proactive customer service is an informed, satisfied customer; a customer less likely to encounter a customer service breakdown in the future.

Ignorance to indifference

The real danger for any company in a market for lemons is that when customers can’t tell the difference between good and bad, the result is indifference. Customers are apathetic about which network they’re with, and their relationships with their operators are predicated purely in terms of flexibility and convenience.

Moreover, as telco move services online, and as customers conduct more of their communications online, telcos are increasingly becoming invisible to consumers.

In a market of lemons where there are hundreds or products vying for attention, and where customer trust is based on nothing to do with quality, the winners will not be those with the best network or the best brand. It will be those that helped customers communicate the easiest.

This post was originally published by Geoffrey on Medium.