Explain the importance of costs in the pricing strategy of your chosen organisation.
Importance of Cost
Cost is more important than ever before, especially in the current economic climate. Businesses are acutely aware of their top and bottom lines. Heightened competition for the cost-conscious consumer puts downward pressure on prices. All of this has ramifications for Next-Gen infrastructure equipment.
A business goal for Network Service Providers is to maximize their return on assets. A large portion of the assets owned by Service Providers come from infrastructure equipment investment. Advanced technological features that result in increased computational power, increased capacity handling and increased physical density are attractive since they allow the Service Providers to implement more features and capabilities using less equipment, thus enhancing the ROA. The lowest possible cost for the equipment is also, of course, very attractive and also increases ROA.
Revenue Sources and Pricing Pressure
Revenue for the Network Service Provider is largely derived from the portions of the network closest to the end-user. However, pricing pressure generally increases as one gets closer to the end user in the network. Price is often a key driver that influences customer adoption of new products or services, particularly so when industry standards dictate network operation and features which limits differentiation. The result is more pressure for lower cost of equipment.
Today, Telcos find themselves in an ultra competitive landscape. With deregulation and technological progress, traditional industry boundaries are breaking down. While already competing for broadband services, cable companies also offer voice services in the form of VoIP. In response, Telcos have began offering video services including advanced IPTV.
Furthermore, advances in technology have produced a new breed of Internet-based competitors. Take for instance VoIP providers such as Skype and Vonage, among many others. In addition, "over-the-top1" Internet Content Providers such as Hulu, CinemaNow, and Amazon Video on Demand (aka Amazon Unbox) may pose a serious threat to both Telcos and MSOs.
Competition for consumers drives down prices and puts further pressure on equipment costs.
To accentuate the cost issue, a very large network transition is expected in wireless and wireline whereby lots of infrastructure equipment will be replaced as the next generation networks are built out. Both wireless and wireline bit rates will increase and the overall network will transition to a packet-based "all-IP" structure. As a result, a large capital expenditure in network equipment will be required. The pressure to drive equipment costs down will be very significant.