Friday, July 15, 2016

Verizon's demand became less elastic

Verizon is raising prices for most services. About three years ago, the smaller carriers, led by T-Mobile, started removing contract restrictions and introduced discounts. The bigger carriers, Verizon and at&t, followed them to some extent. But things seem to be settling down to where customers switch less often.
"Wireless phone buyers have gone into their typical hibernation mode, while they wait for the new iPhone release," Mr. Moffett said. "Switching activity has slowed to a crawl. It's the ideal time to raise rates." 

With less elastic demand, the desired markup rises.

7 comments:

  1. Verizon is the largest wireless phone provider in the United States with almost 143 million subscribers. With the lowest average churn rate of 1.19% and the largest revenue of about 16.7 billion dollars a year1. It’s highly rated network covers about 98 percent of the U.S. population2.
    As a result Verizon’s pricing is very inelastic. Small changes in pricing and fees generally do not affect the number of customers is has. This is evidenced by its low churn rate indicating that the vast majority of its customer value the service they receive. While the competitors are trying to compete with pricing, Verizon’s vast advanced network keeps customers from switching. Even with Verizon recently adding another $20 fee when upgrading phones, they have been able to maintain their market share3. In order to ensure it keeps its customers, Verizon has been making large investments in the next generation of 5G wireless technology. As a result it will be able to offer the new, faster technology much sooner than its competitors. The added value that consumers perceive offset the increase in prices that signal inelastic pricing and demonstrate that customers are willing to pay more to continue using the product or service.

    1. http://www.fiercewireless.com/wireless/how-verizon-at-t-t-mobile-sprint-and-more-stacked-up-q2-2016-top-7-carriers
    2. https://www.verizonwireless.com/landingpages/better-matters/
    3. http://money.cnn.com/2016/03/31/technology/verizon-upgrade-fee/
    4. https://www.cnet.com/news/verizon-to-hold-worlds-first-crazy-fast-5g-wireless-field-tests-next-year/

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  2. Verizon has been actively watching the impact of its changing pricing structure. It appears to be attempting to move more towards the same structure as its competitors, but with unique features in hopes of increasing their competitive edge. Through breaking out the different features of their plan, they have separated pricing based on what the individual is purchasing and how many lines they are utilizing on their bill. The bill highlights the charges for the "plan" level and then breaks out the "per line" level as well. The plan highlights the main feature of data usage limits. Beyond that, the individual has to select the pricing scheme they want for phone/texting and then any additional features they want per line. The big thing is their move entirely away from the need to purchase the phone directly. In the past, even to upgrade, you received a $100 credit towards your upgrade and had to pay the balance in full at the time you received the new phone. Now, they allow you to pay the full retail value of the phone off over two years, with the sales tax being the only charge you pay up front. This payment fee appears on your bill under the "per line" level. So, depending on which phone(s) you purchase, determines how much you pay. After two years, the phone is paid off and your entire bill is reduced by the monthly cost of the phone. And there is no way to pay these charges off early. You either pay full retail value at time of purchase, or you have to pay over the two years.
    This shift in pricing structures has really brought to light the need to focus on pricing. When all else seems stale, they found a different way to effect pricing. By breaking apart the pricing structure, they can utilize the ability to market different features to individuals to increase their revenue opportunity.


    https://www.verizonwireless.com/plans/verizon-plan/?cmp=KNC-C-HQ-NON-R-AC-NONE-NONE-2K0PX0-PX-GAW-71700000010351322&gclid=CNGitLy81c8CFQZkNwodGboLCg&gclsrc=ds

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  3. Verizon and AT&T are two of the nation’s biggest U.S. providers in wireless communication controlling about 270 million of the country’s 395 million connections and also pocketing the majority of the industry’s profits (Knutson, 2016). As a monopoly Verizon does not have to worry about rivals in the industry since the company has attributes that protect it from the forces of competition (Froeb, et al, 2016). Despite aggressive discounting by smaller rivals, Verizon continues to hold its position in the market and decrease its elasticity.

    Elasticity is an indicator of what is likely to happen on the demand curve when a shift in price takes place in any market. Introducing higher prices to consumers is usually indicative of a shift on the demand curve to the right that shows a product or service becoming more elastic, since consumers typically refrain from buying products when prices are raised. The price elasticity of demand for Verizon falls somewhere between zero and one; this makes it more inelastic than elastic with a shift on the demand curve to the left.

    As a customer of Verizon for several years now, I appreciate the reliable service and the new flexibility in choices that Verizon provides me, therefore I am reluctant to change providers despite the aggressive discounting by smaller rivals. It is this consensus amongst consumers that has allowed Verizon to remain a monopoly, raise prices and shift towards inelasticity on the demand curve. Verizon will continue to dominate this industry since the demand for its services has not changed despite its price increases. According to (Froeb, et al, 2016), firms have a competitive advantage when they can a) deliver the same product or service benefits as their competitors but at a lower cost or (b) deliver superior product or service at a similar cost. Verizon has shown that they can have a competitive advantage by delivering superior product or service at a higher cost.

    Knutson, Ryan (2016). Fox Business. Verizon to Raise Cost of Monthly Wireless Plans. Retrieved from http://www.foxbusiness.com/markets/2016/07/06/verizon-to-raise-cost-monthly-wireless-plans.html

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial Economics. A Problem Solving Approach. 4th Ed. Cengage Learning.

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  4. Verizon has made big news in the last few days promoting their unlimited data for both new and present customers. Other major providers have been offering this for some time forcing Verizon to change their approach to remain competitive. Are they just mimicking what other companies like AT & T and T-Mobile are already doing?
    As reported by Fortune yesterday Verizon had to make the change sooner than later as they were losing market share to Sprint and T-Mobile. Aaron Pressman reported that in 2016 Verizon only added half of the new customers that they added in the year before while T-Mobile surpassed Verizon with new phone users by one million new users. In the summer of 2015, Verizon changed their approach and dropped the cell phone contract following after T-Mobile was the first to end the contract restriction again showing that Verizon is not first with their strategies.
    As Pressman continues to report Verizon had no choice to but to make changes because of the increase of competition among cell phone providers. Tomi Kilgore reporter and editor of MarketWatch, reports today that Verizon’s stock slumped 0.9% in afternoon trade, paring earlier losses of as much as 1.8%. Among its rivals, shares of T-Mobile U.S. shed 2.7%, of Sprint slid 1.4% and of AT&T dropped 1.9%. Verizon stock has lost 3.1% over the past year while shares of T-Mobile and Sprint have soared.
    Verizon was not the first to end the 2-year cell phone contract or the first to offer unlimited data. Verizon could grow their market share if they created something different or something that wasn’t already being done by others. Where T-Mobile is growing in their focus on the pre-paid phone market hoping to add over 1 million pre-paid customers while other carriers are losing that niche or are showing slow growth. It seems as though the big name of Verizon is just not enough anymore and we will see if their re-introduction of unlimited data makes the needle move in the direction they are expecting.
    References:
    Pressman, A. (2017, February 13). Why Verizon Finally Caved on the Unlimited Data Plan. Fortune Magazine. Retrieved from http://fortune.com/2017/02/13/verizon-unlimited-data-plan-cell-phone/
    Kilgore, T. (2017, February 14). Verizon caves to competition with unlimited wireless data, stock falls. MarketWatch. Retrieved from http://www.marketwatch.com/story/verizon-caves-to-competition-with-unlimited-wireless-data-stock-falls-2017-02-13

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  5. Friday, July 15, 2016
    https://managerialecon.blogspot.com/2016/07/verizons-demand-became-less-elastic.html
    Verizon's demand became less elastic
    I love reading anything that is related to Verizon. I have been a Verizon customer for over twenty years so I always pay attention to changes and business strategy. I used to love the company as they were very customer focused and strived to make sure they were above and beyond the rest in the industry. At times they had the highest monthly cost in the industry but had great network service not matter where the customer was located and customer service more than made up for it. Now you have companies that have caught up and have coverage in as many areas as Verizon and offer the services at almost half the monthly price of Verizon. Last year they tried to roll out the new program that would supposedly lower the monthly premium for customers but I found personally it increased my premium.
    Although they have rolled out this new plan to try and keep up with other carriers there are a lot of hidden items they are not being honest about. The fact that its unlimited package which you do pay per line for like other carrier but it slows your network speed down to drastically. Nothing is truly unlimited as they are making it sounds, Verizon is looking the unlimited to 22GB a month and hotspot or tethering to 10GB a month. To me if I am paying $80 for one line and $60 for the second I would expect to have truly unlimited data and hotspot. The next catch to the new unlimited plan is you need to enroll in automatic payment.
    I can see how this might benefit some people who might use a lot a data but I personally do not see the benefit of the new plan. This might be beneficial to people who travel all the time or in a non WIFI environment. For most people this plan is not cost effective for the monthly fee to have the unlimited data as most places you can connect to WIFI for free in most places and maintain a fast speed of service. Don’t get me wrong I am still a loyal Verizon customer; I just wish they would find ways to decrease the cost of month premium without taking network speed and service away.


    Reference:
    Pegoraro, R (2017, February 13) How Verizon’s New unlimited pan compares to the competition

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  6. Verizon tops the list as the most popular cell phone carrier company for many years in a row. The next leading carrier that has also been verizons competition is AT&T, but somehow verizon always seems to come out on top.For the last three years, Verizon has remained focused on creating the nation's best 4G LTE network, which now covers 97% of the U.S. and is up to 10 times faster than other 3G networks. Verizon put themselves at a competitive advantage by differentiating themselves from other companies giving them the upper hand.Verizon Wireless cellular service is inelastic because the products and services it offers makes them the dominant leader in the wireless industry; therefore, a 10% change in calling plan prices (monthly access fees) would not affect the quantity demanded. Verizon Wireless can depend on this inelasticity in their pricing model because of the strength of its brand and the wealth of products and services it offers. Verizon is established and has the upper hand over other cell phone carrier. They dont have to worry about competition with lower prices because of the success their name has earned. Verizon is constantly coming out with new plans and savings to keep their customers happy, without having to beat out competitors prices.

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