I’ve Said It Before and I’ll Say it Again: A New Pricing Strategy Can Generate Growth By “Activating” Dormant Customers
I’m often asked, “Rafi, what is your favorite pricing strategy?” Hands down, my personal favorite is segment-based pricing. The idea underlying segment-based pricing is straightforward: there often are potential customers interested in your product, but they refrain from purchasing because your pricing strategy simply does not work for them. Offering a new pricing strategy can activate these “dormant” customers and generate growth. Amol Sharma wrote an interesting article in yesterday’s Wall Street Journal that highlighted how the cellular service company Cricket, a subsidiary of Leap Wireless International, is activating dormant customers through segment-based pricing.
The U.S. cellular market is crowded these days, the CTIA – Wireless Association estimates that more than 72% of the U.S. population has a cell phone. 72%...a pretty tough market to generate significant growth, wouldn’t you think? In spite of this challenging market, Goldman Sachs expects Cricket to double its subscriber base in the next three years and increase service revenue by 30% a year (in comparison, large U.S. cellular carriers are forecast to have 5% growth). Cricket is generating blockbuster growth in a stagnant market in a manner that we all can learn from.
First off, let’s look at who Cricket’s customers are. The company focuses on an underserved market: young, low income, ethnic, and sometimes credit challenged customers. Oh, and many of its customers want to forego landlines and exclusively use cellular telephone service (51% of its customers use Cricket as their only phone, 93% use it as their primary phone). A reasonable segment to target, but what makes Cricket so special? There are a wide variety of companies that serve this market (e.g., prepaid). You guessed it…the answer lies in its pricing strategy. Cricket offers prepaid unlimited usage plans and doesn’t require credit checks or long term contracts. For $30 a month, Cricket customers enjoy unlimited incoming and local outgoing calls. An additional $10 a month buys unlimited long distance and calling features (e.g., three way calling, voice mail). Not a bad deal! Of course, there is a small catch: if you use your cell phone outside of your home area, you get zapped with hefty roaming charges. This “small catch” is integral to creating a service that is well-targeted to Cricket’s key customers. Offering an unlimited plan distinguishes Cricket's pricing strategy from others. Few carriers offer unlimited plans and those that do charge at least double what Cricket charges (though their plans are more flexible about calling outside of the subscriber's home area).
Cricket has built a thriving company based, in large part, on segment-based pricing. A new pricing strategy is driving growth and the company’s future looks bright. Wall Street must agree, as shares of Leap Wireless are up over 58% this year.
Segment-based pricing is a strategy that can drive (often blockbuster) growth for most companies. With the first of the year around the corner, now is a good time to take stock on what dormant customers are lurking around your cash register and what pricing strategies will active them.
Have a question or comment, please feel free to send them to me! I update this blog three times a week – please consider signing up to be notified by e-mail of a new blog post.
