retail_vs_cost_plus

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MVNO/E Tariff Models Determined by MNO • Tariff model “Retail minus” • Retail price – Negotiated price • Low MVNO margins • Discourage price competition • Defend MNOs position and interest Determined by Regulator • Tariff model “Cost plus” • Cost price + agreed premium/ margin • Higher margins for MVNOs • Freedom to compete on price Radio Core Gateways HLR Other/ SMSC Billing IN Cust. care Dist. Mktg Pricing Models Cost Plus Retail Minus Margin The “ retail minus ” approach sets wholesale access prices based on the end-user or retail prices of the corresponding final services minus a discount, which is usually set as a fixed percentage of the retail price. The “ cost plus ” approach sets these prices by calculating the incremental costs of provisioning the wholesale service and then adding a profit margin to it.

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Market Assumptions Subscriber Assumptions Retail -minus Assumptions Prices Assumptions Commercials Assumptions NW CAPEX & OPEX Assumptions WHOLESALE COSTS REVENUES RETAIL COSTS NETWORK COSTS Calculation Retail Minus Network Model Retail Costs Model Revenues Model Wholesale Model RETAIL MINUS CALCULATION

Retail vs Cost Plus:

Retail vs Cost Plus ‘Retail minus’ consists in proposing to the MVNO an access to the network with a wholesale price with a discount compared to the retail price. This model works when the mobile operator is not present in all markets and if it wants to push its MVNO in niche markets where it is not present. Most of the time these will be markets where the mobile operator has been inefficient (marketing costs, ethnic markets,…). The MVNO is able to sell with less operational costs and so can penetrate the market more efficiently. ‘Retail Minus’ also avoids squeeze out as the discount guarantees a minimum margin. But ‘Retail Minus’ will not promote commercial innovation as the MVNO will copy the retail offers from its hosting operator as it is sure to get a margin (via the discount). ‘Retail minus’ should be avoided in case of strong cross subsidization applied by the hosting mobile operator: this will force the MVNO to address the same markets as its hosting mobile operator because the cross subsidization will be especially suited for these markets.

Retail Minus vs Cost Plus:

Retail Minus vs Cost Plus ‘Cost plus’ consists in calculating accurately the cost of a unit of traffic or service (most of the time in terms of minutes) that transits through the network.. ‘Cost plus’ is adapted if the hosting operator is strongly vertically integrated. This integration uncouples the retail price from the cost of the network. Therefore the mobile operator could, via a retail minus, propose a price much higher that the real cost and so get as much unfair profits as with its own commercial operations towards the retail market. So ‘Cost plus’ should for sure be applied when an incumbent operator has to host MVNOs. Furthermore ‘Cost plus’ forces the MVNO to address markets where the mobile operator is not present. The MVNO will have to build its own cross subsidization policy that is adapted for such new market. If it tries indeed to address the segments where the mobile operator is already present, the latter will remain always ahead in terms of penetration thanks to economies of scale and scope it has accumulated. Last but not least, a ‘Cost plus’ minute is sold with profit from very first one as it is based on the real cost of a transit through the network. This is also why the ‘Cost plus’ approach is more vulnerable to ‘Squeeze out’ as cross subsidization can result in a retail price inferior to the cost of the transit of a minute through the network. If one opts for a ‘Cost Plus ‘, then modeling the network becomes highly necessary. There is a risk indeed to charge the MVNO for elements in the network it does not really use. This is especially true once again for a vertically integrated operator that does not know what elements in the network are really used to deliver an end-to-end service. Therefore it is very difficult to split such an end-to-end service sold for so many years in the retail market into a wholesale part and a retail part. This is even more critical for emerging services where the real cost of each piece of the service is unknown in the design stage. Once the cost drivers are defined, one uses them to link the bricks of the network (mast, switches, backbone elements) with the wholesale services proposed to the MVNO. The wholesale service delivered to the MVNO are: access/origination, termination and roaming.

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