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ANALYTICS

                          Unlocking Customer Behavior Insights
                          To Boost Pricing Performance

                          Sagy Gulianka
                          March 13, 2012

© 2012 – PROPRIETARY AND CONFIDENTIAL INFORMATION OF CVIDYA
Topics

    Marketing and pricing framework
    Pricing analytics and examples of analysis results
    Introduction to behavioral economics
    iPAD case study



2
Pricing Framework




3
Marketing Framework In Telecom

    Customers                                                        Behaviour and past
                               Needs             Perceptions             selections




    Collect                 Customers              Market              Customer info
    Information            Interactions          Researches               & XDRs
                                                                                                Behavioural
                                                                                             structured pricing
    Internal marketing      Ideas for                               Income, profitability,
    Analysis/             new products          Segmentation                CLV
    deliverables
                                               Relative Value,         Pricing points,       Effective message
    Pricing Analysis/    Pricing structures   willingness to pay,     financial impact
    deliverables                              price perception


                            Retention            Acquisition                                   Communication
                                                                     Cross and Up sell
    Context



4
Pricing Framework In Telecom

                                                                             Filters
    Work plan             Ideas                                                                                        Implementation
                        generation                                                                                                                 Launch
                                                     Primary                    2nd                    3rd

                                            Reject options             Test market            Fine tune          Approve price plan          Compose
                 Based on inputs            not consistent              acceptance of           pricing plans       using quantitative and       simple,
                 scope all options          with:                       remaining               and pricing         qualitative info             creative,
                 available in                Strategy                  options                 level through       Communicate                  effective
    Objectives   pricing                                               Assess                  sensitivity
                                                                                                                
                                                                                                                    preferred options to         message
                                             Technical
                                                                        competitive             analysis            IT and technical
                                             Economics
                                                                        reaction               Determine           groups and adapt
                                                                                                financial           where necessary
                                                                                                impact
                    Internal brain-           Internal               One to one             Business plan      Financial analysis as       Behavioural
                     storming                   decision                interviews                                  part of decision             economics
                                                                                               Financial                                        methods
                    Int’l best practises       making, unit           Focus groups            analysis           Cross-functional
                                                meeting
      Tools                                                            Quantitative           Forecasting         co-ordination
                                               Initial financial       research                                    meeting
                                                tests
                                                                       Competitive
                                                                        price positioning
                                                                        analysis

5
Pricing Analytics




6
Pricing Analytics Tradeoffs

                            Accuracy   Support complexity of pricing plans
                                       and market XDR analysis




        Time to Market                                               Better Pricing Decisions
        Speed of analysis                                            Richness of results, detailed per
                                                                     segment analysis




7
How Many Different Structures Can Be
    Built With Six Lego Bricks




           There are 915 million ways
           to combine six LEGO bricks

8
Accurately Calculating The Financial Impact Of
    New/Refreshed Pricing Plans Is A Challenge
                                Allowances            Multiple                             Prepaid,
     Base plans,                                    allowances,      Service                               Roaming
      add-ons,                                       priority &      bundles               pospaid,         zones
     promotions           Value        Volume         rankings                              hybrid


     Monthly fee,                                 Bespoke         Best plan,               Acount,
      discounts,          Usage rates              offers          optima                subscribers       Roll overs
       rebates                                                                              levels


     Daily/                                      Off-peak,   Connection                     Per second
     weekly         Friends &      Tier, step    weekend        fee,           Data &       billing, 12,   The most
     offers           family       calls rates   discounts    minimum          content           60
                                                                price




     Almost unlimited number of potential pricing mixed

9
Bundle The Right Pricing Structures And Values
     For Each Segment
     High                                                                “Take advantage” – Price increase
                                                                         1. Out of bundle billing increment
                   1                           2              3
                                                                         “Calculated risk” – price differentiation
                Low awareness                                            2. Monthly fee (Segment A)
                                         High awareness
                                                                         3. Data bundle size
      Revenue




                                                                         “Collect pennies” – price increase
                                               6                         4. MMS
                                5                         7              5. Handset insurance
                   4
                                                                         “Strategic move” – Price decrease
                                          High price perception
                                                                         6. Monthly fee (Segment B)
                                                                         7. Roaming
                        Risk (measured by price
      Low              sensitivity and churn risk)                High



10
Examples Of Analytics Results (1)

         Usage profiles by pricing plans   ARPU distribution by service




11
Examples Of Analytics Results (2)

               Original                  New Simulation




12
Examples Of Analytics Results (3)

           ARPU change by Service   Dilution analysis by original pricing plan




13
Adding Value Is Hard, Capturing Value Is Art

     Sometimes the value is easy to measure (e.g. cost savings), but difficult to
     capture due to perceptions and tendencies


     Marketers                                        Consumers

                              Add value                  Perceived value


                          Communicate value             Message reception

                             Influence the               Price perception
                           willingness to pay




14
Behavioral Economics




15
Behavioral Economics

      Behavioral economics use social, cognitive and emotional factors to
       understand the economic decisions of individuals and institutions performing
       economic functions, including consumers, borrowers and investors, and their
       effects on market prices, returns and resource allocation
      Behavioral economics brings the science much closer to the “artistic” part of
       commercials
      The message influences the product



16
Daniel Kahneman

     9th October 2002
                        Daniel Kahneman testified that he never took a course
                        in economy. He is notable for his work on decision-
                        making and behavioral economics.
                        With Amos Tversky and others, Kahneman established a
                        cognitive basis for common human errors and
                        developed prospect theory . He was awarded the 2002
                        Nobel Memorial Prize in Economics for his work in
                        prospect theory.




17
Prospect Theory
                                      Pleasure
                                                                        Diminishing
                                                                      marginal pleasure
                                                                         (and pain)



                      Loss -                              Gain
                                                    The reference
            The pain of loss is                    point can change
             greater than the                           rapidly
             pleasure of gain
                                        Pain

        A person found a $100 but lost it after a minute. Is he the same?
        Loss aversion, postponing losses
18      Attaching a small spend to a larger spend
Use Of Loss Aversion To Increase Credit Card
     Spend



                           Money is credited




19               Bitter Wallet blog - By Paul Smith
Use Of Loss Aversion For Retention
      An Italian telecom company managed to increase
       the acceptance rate of an offer made to customers
       when they called to cancel their service
      Originally, a script informed them that they would
       receive 100 free calls if they kept their plan
      The script was reworded to read - “We have
       already credited your account with 100 calls —
       how could you use those?”
      Many customers did not want to give up free talk
       time they felt they already owned

20        McKinsey Quarterly: 2/2010
An Experiment That Assisted To Identify Loss
     Aversion
     Imagine you are facing the following decisions
     Decision A:
     1. Earn $1,000
     2. Take a 25% chance to earn $10,000 and 75% chance of earning nothing
     Decision B:
     1. Loss of $5,000
     2. Take a 75% chance of losing $10,000 and a 25% chance of losing nothing

     Most people choose options 1 and 4 although options 2 and 3 are statistically better


21
This Version Of The Loss Aversion Experiment
     Was Really Astonishing
     In her January 26 2006 column in the New York Times column, Virginia Postrel
     presented an intriguing discussion of a paper written by Shane Frederick,
     professor of Management Science at MIT
     He asked people (mostly students) to select one of the following:
     1. Win $500
     2. Take a 15% chance at
        winning 1 million dollars




                      Why So Many People Are Unwilling To Wait For or Gamble on a Bigger Payoff
22                    David A. Levine
CRT - "Cognitive Reflection Test"
     Shane Frederick developed a test to determine how rational people are.
     This is one of 3 questions in this test:

     A bat and a ball cost $1.10. The bat costs $1.00 more than the ball.
                   HOW MUCH DOES THE BALL COST



                                                  Answer: 5 cents


23
The Results Of The Experiment
          High CRT – answered all the questions correctly
          Low CRT - answered none of the questions correctly
         Group            Win $500   15% chance of winning 1 million dollars


         High CRT men
         Low CRT men
         High CRT women
         Low CRT Women


     Less impulsive people (when answering questions) tend to bet more on the bigger prize
     People that are good with numbers tend to make more profitable decisions


24
Behavioral Biases
     Case Study - iPAD




25
Framing Effect Experiment
     Scenario 1
      Option A saves 200 people's lives
      Option B has a 33% chance of saving all 600
        people and a 66% possibility of saving no one
     Scenario 2
      If option C is taken, then 400 people die
      If option D is taken, then there is a 33% chance that no
        one will die and a 66% probability that all 600 will die


      Scenario 1 = Scenario 2
      Different phrasing impacted participants' responses to a question
       about a disease prevention strategy

26
The Message Has A Major Influence On The
     Perceived Value




27
KISS




              In many cases:
28
       Too many choices = No selection
Anchoring Effect
          Customers have no Idea how much they are willing to pay
          Initial prices can be almost random, but once anchored, they will influence similar product
           prices
          An anchor might seem to be totally irrelevant
          The following examples demonstrate the correlation between writing the last 2 digits of the
           credit card and the willingness to pay
                                                                         People with higher
              People with                                                2 digits are willing
             lower 2 digits                                                to pay more…

             Last 2 digits of
                                     –               –       –       –        –        Correlation
                   SSN
                Cordless
                                 $               $       $       $        $
                Keyboard
                Neuhaus
                                 $               $       $       $        $
               chocolates




29       Dan Ariely - Predicting Irrationality
Compromise Effect

               A
     Economy




                         C

                                      B


                      Quality


     Adding Option A will increase
     the selection of option C that
     becomes the compromise point
                                          More people prefer the middle option
     C. Simonson and Tversky (1992)


30
iPAD Presentation


                          What is the right price for a new
                           product?
                          Can consumers say how much a
                           product is worth to them?
                          How do we influence the price
                           perception?




31
iPAD Pricing Points


                                     Which module would/did you choose?
                                     What is the leading selling model?



     Apple sales figures on launch day in London:
                     16 GB   32GB     64GB
          WIFI        6%      17%     3%
        WIFI + 3G     18%     33%     23%




32
iPAD Launch - Behavioral Economic in Use

                                    Initial Anchor = $999, everything
                                     below that is not expensive
                                    Lower pricing point = $499, Effective
                                     for price perception. The message
                                     is: “…starting at $499…”
                                    Compromise effect in action. The
                                     sweet point is 32MB
                                    Simple message, few options, easy to
                                     understand, easy to compare



33
Summary


           Solid Pricing Framework

      Accurate, fast    Understand       Simple
        and rich       and measure      effective
        analytics       values and   message, influe
                       perceptions   ntial methods




34
cVidya Pricing Analytics
     Solutions




35
About cVidya

A global leader and innovative provider of Revenue Intelligence
solutions for Telecom, Media and Entertainment service providers
  150 customers                                 #1 Revenue Management Global Market
      20 out of the 30 largest operators          Provider by Gartner (April 2011)


  300 employees                                 TM Forum Leadership
  Global presence in 20 locations
  Partnership with the world leading vendors



36
OfferImpact™


     A comprehensive and accurate analytics
     solution that supports on time pricing
     decisions based on advanced modeling &
     methodologies




37
OfferAdvisor™



                A comprehensive, robust and accurate
                “Next Best Offer” solution providing
                personalized, value-driven pricing plan
                recommendations to achieve retention
                and revenue targets




38
Contacts

  Sagy Gulianka
   Pricing Expert
   sagy.gulianka@cvidya.com

  Amit Sheps
   Pricing Analytics Products Manager
   amit.sheps@cvidya.com


39
THANK YOU!
www.cvidya.com

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Unlocking Customer Behavior Insights To Boost Pricing Performance - cVidya Webinar

  • 1. ANALYTICS Unlocking Customer Behavior Insights To Boost Pricing Performance Sagy Gulianka March 13, 2012 © 2012 – PROPRIETARY AND CONFIDENTIAL INFORMATION OF CVIDYA
  • 2. Topics Marketing and pricing framework Pricing analytics and examples of analysis results Introduction to behavioral economics iPAD case study 2
  • 4. Marketing Framework In Telecom Customers Behaviour and past Needs Perceptions selections Collect Customers Market Customer info Information Interactions Researches & XDRs Behavioural structured pricing Internal marketing Ideas for Income, profitability, Analysis/ new products Segmentation CLV deliverables Relative Value, Pricing points, Effective message Pricing Analysis/ Pricing structures willingness to pay, financial impact deliverables price perception Retention Acquisition Communication Cross and Up sell Context 4
  • 5. Pricing Framework In Telecom Filters Work plan Ideas Implementation generation Launch Primary 2nd 3rd Reject options  Test market  Fine tune  Approve price plan  Compose Based on inputs not consistent acceptance of pricing plans using quantitative and simple, scope all options with: remaining and pricing qualitative info creative, available in  Strategy options level through Communicate effective Objectives pricing  Assess sensitivity  preferred options to message  Technical competitive analysis IT and technical  Economics reaction  Determine groups and adapt financial where necessary impact  Internal brain-  Internal  One to one  Business plan  Financial analysis as  Behavioural storming decision interviews part of decision economics  Financial methods  Int’l best practises making, unit  Focus groups analysis  Cross-functional meeting Tools  Quantitative  Forecasting co-ordination  Initial financial research meeting tests  Competitive price positioning analysis 5
  • 7. Pricing Analytics Tradeoffs Accuracy Support complexity of pricing plans and market XDR analysis Time to Market Better Pricing Decisions Speed of analysis Richness of results, detailed per segment analysis 7
  • 8. How Many Different Structures Can Be Built With Six Lego Bricks There are 915 million ways to combine six LEGO bricks 8
  • 9. Accurately Calculating The Financial Impact Of New/Refreshed Pricing Plans Is A Challenge Allowances Multiple Prepaid, Base plans, allowances, Service Roaming add-ons, priority & bundles pospaid, zones promotions Value Volume rankings hybrid Monthly fee, Bespoke Best plan, Acount, discounts, Usage rates offers optima subscribers Roll overs rebates levels Daily/ Off-peak, Connection Per second weekly Friends & Tier, step weekend fee, Data & billing, 12, The most offers family calls rates discounts minimum content 60 price Almost unlimited number of potential pricing mixed 9
  • 10. Bundle The Right Pricing Structures And Values For Each Segment High “Take advantage” – Price increase 1. Out of bundle billing increment 1 2 3 “Calculated risk” – price differentiation Low awareness 2. Monthly fee (Segment A) High awareness 3. Data bundle size Revenue “Collect pennies” – price increase 6 4. MMS 5 7 5. Handset insurance 4 “Strategic move” – Price decrease High price perception 6. Monthly fee (Segment B) 7. Roaming Risk (measured by price Low sensitivity and churn risk) High 10
  • 11. Examples Of Analytics Results (1) Usage profiles by pricing plans ARPU distribution by service 11
  • 12. Examples Of Analytics Results (2) Original New Simulation 12
  • 13. Examples Of Analytics Results (3) ARPU change by Service Dilution analysis by original pricing plan 13
  • 14. Adding Value Is Hard, Capturing Value Is Art Sometimes the value is easy to measure (e.g. cost savings), but difficult to capture due to perceptions and tendencies Marketers Consumers Add value Perceived value Communicate value Message reception Influence the Price perception willingness to pay 14
  • 16. Behavioral Economics  Behavioral economics use social, cognitive and emotional factors to understand the economic decisions of individuals and institutions performing economic functions, including consumers, borrowers and investors, and their effects on market prices, returns and resource allocation  Behavioral economics brings the science much closer to the “artistic” part of commercials  The message influences the product 16
  • 17. Daniel Kahneman 9th October 2002 Daniel Kahneman testified that he never took a course in economy. He is notable for his work on decision- making and behavioral economics. With Amos Tversky and others, Kahneman established a cognitive basis for common human errors and developed prospect theory . He was awarded the 2002 Nobel Memorial Prize in Economics for his work in prospect theory. 17
  • 18. Prospect Theory Pleasure Diminishing marginal pleasure (and pain) Loss - Gain The reference The pain of loss is point can change greater than the rapidly pleasure of gain Pain A person found a $100 but lost it after a minute. Is he the same? Loss aversion, postponing losses 18 Attaching a small spend to a larger spend
  • 19. Use Of Loss Aversion To Increase Credit Card Spend Money is credited 19 Bitter Wallet blog - By Paul Smith
  • 20. Use Of Loss Aversion For Retention  An Italian telecom company managed to increase the acceptance rate of an offer made to customers when they called to cancel their service  Originally, a script informed them that they would receive 100 free calls if they kept their plan  The script was reworded to read - “We have already credited your account with 100 calls — how could you use those?”  Many customers did not want to give up free talk time they felt they already owned 20 McKinsey Quarterly: 2/2010
  • 21. An Experiment That Assisted To Identify Loss Aversion Imagine you are facing the following decisions Decision A: 1. Earn $1,000 2. Take a 25% chance to earn $10,000 and 75% chance of earning nothing Decision B: 1. Loss of $5,000 2. Take a 75% chance of losing $10,000 and a 25% chance of losing nothing Most people choose options 1 and 4 although options 2 and 3 are statistically better 21
  • 22. This Version Of The Loss Aversion Experiment Was Really Astonishing In her January 26 2006 column in the New York Times column, Virginia Postrel presented an intriguing discussion of a paper written by Shane Frederick, professor of Management Science at MIT He asked people (mostly students) to select one of the following: 1. Win $500 2. Take a 15% chance at winning 1 million dollars Why So Many People Are Unwilling To Wait For or Gamble on a Bigger Payoff 22 David A. Levine
  • 23. CRT - "Cognitive Reflection Test" Shane Frederick developed a test to determine how rational people are. This is one of 3 questions in this test: A bat and a ball cost $1.10. The bat costs $1.00 more than the ball. HOW MUCH DOES THE BALL COST Answer: 5 cents 23
  • 24. The Results Of The Experiment  High CRT – answered all the questions correctly  Low CRT - answered none of the questions correctly Group Win $500 15% chance of winning 1 million dollars High CRT men Low CRT men High CRT women Low CRT Women Less impulsive people (when answering questions) tend to bet more on the bigger prize People that are good with numbers tend to make more profitable decisions 24
  • 25. Behavioral Biases Case Study - iPAD 25
  • 26. Framing Effect Experiment Scenario 1  Option A saves 200 people's lives  Option B has a 33% chance of saving all 600 people and a 66% possibility of saving no one Scenario 2  If option C is taken, then 400 people die  If option D is taken, then there is a 33% chance that no one will die and a 66% probability that all 600 will die  Scenario 1 = Scenario 2  Different phrasing impacted participants' responses to a question about a disease prevention strategy 26
  • 27. The Message Has A Major Influence On The Perceived Value 27
  • 28. KISS In many cases: 28 Too many choices = No selection
  • 29. Anchoring Effect  Customers have no Idea how much they are willing to pay  Initial prices can be almost random, but once anchored, they will influence similar product prices  An anchor might seem to be totally irrelevant  The following examples demonstrate the correlation between writing the last 2 digits of the credit card and the willingness to pay People with higher People with 2 digits are willing lower 2 digits to pay more… Last 2 digits of – – – – – Correlation SSN Cordless $ $ $ $ $ Keyboard Neuhaus $ $ $ $ $ chocolates 29 Dan Ariely - Predicting Irrationality
  • 30. Compromise Effect A Economy C B Quality Adding Option A will increase the selection of option C that becomes the compromise point More people prefer the middle option C. Simonson and Tversky (1992) 30
  • 31. iPAD Presentation  What is the right price for a new product?  Can consumers say how much a product is worth to them?  How do we influence the price perception? 31
  • 32. iPAD Pricing Points  Which module would/did you choose?  What is the leading selling model? Apple sales figures on launch day in London: 16 GB 32GB 64GB WIFI 6% 17% 3% WIFI + 3G 18% 33% 23% 32
  • 33. iPAD Launch - Behavioral Economic in Use  Initial Anchor = $999, everything below that is not expensive  Lower pricing point = $499, Effective for price perception. The message is: “…starting at $499…”  Compromise effect in action. The sweet point is 32MB  Simple message, few options, easy to understand, easy to compare 33
  • 34. Summary Solid Pricing Framework Accurate, fast Understand Simple and rich and measure effective analytics values and message, influe perceptions ntial methods 34
  • 35. cVidya Pricing Analytics Solutions 35
  • 36. About cVidya A global leader and innovative provider of Revenue Intelligence solutions for Telecom, Media and Entertainment service providers  150 customers  #1 Revenue Management Global Market 20 out of the 30 largest operators Provider by Gartner (April 2011)  300 employees  TM Forum Leadership  Global presence in 20 locations  Partnership with the world leading vendors 36
  • 37. OfferImpact™ A comprehensive and accurate analytics solution that supports on time pricing decisions based on advanced modeling & methodologies 37
  • 38. OfferAdvisor™ A comprehensive, robust and accurate “Next Best Offer” solution providing personalized, value-driven pricing plan recommendations to achieve retention and revenue targets 38
  • 39. Contacts  Sagy Gulianka Pricing Expert sagy.gulianka@cvidya.com  Amit Sheps Pricing Analytics Products Manager amit.sheps@cvidya.com 39