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TR608 Assignment on Pricing War Rdasha

TR608 Assignment on Pricing War Rdasha

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FACULTY OF ECONOMICS AND MANAGEMENT DEPARTMENT OF MANAGEMENT MASTER OF SCIENCE IN ICT POLICY AND REGULATION (MSCICTPR

)

Comprehensive research analysis in Rwandan context while addressing aspects of pricing war scenarios… as undertaken by existing operators (Case of TIGO)

Assignment- TR608
Prepared and submitted by BWANAKWELI Chantal Reg: PG 102000046

ADVANCED PRICING

................................................................................... DEFINITION OF PRICING WAR................................................10 ROLE OF RURA IN ADDRESSING PRICING WAR.......... INTRODUCTION.........12 REFERENCES...........11 RECOMMENDATION AND CONCLUSION................................................................. 12 2 .................................Contents Contents.......... 2 1................................................................................................... CAUSES OF PRICING WAR...................................................................................................................................5 AVODING PRICE WAR.................................................................................................................................................................................4 3.............................3 2................

Price war is a term used in the economic sector to indicate a state of intense competitive rivalry accompanied by a multi-lateral series of price reductions. from grocery retailing to computer software. most price wars start by accident. are the marginal firms and their investors. is immune. All too often. through some apparently trivial misreading or misjudgment of market conditions. The remaining firms absorb the market share of those that have closed. from automobile tires to disposable diapers. prices tend to increase. from cigarettes to frozen diet dinners.1. a new round of reductions starts. No company. Often they are not good for the companies involved because the lower prices reduce profit margins and can threaten their survival. firms cannot compete and must close. there are no winners— and few healthy survivors. price wars can be good for the dominant firms in the industry. the consumer may lose too. The destruction such battles cause can be so severe and linger so long that the only reliable way to come out ahead is to avoid them altogether. sometimes higher than before the price war started. The real losers then. INTRODUCTION Price wars have racked industry after industry in recent years: from personal computers to airlines. Typically. Rare is the price war that is initiated as a deliberate competitive tactic —and rarer still the one that achieves a satisfactory outcome. One competitor will lower its price. With fewer firms in the industry. In the medium to long term. Even companies with superior overall strategies and exceptional execution can destroy themselves by not managing this make-or-break issue effectively. 3 . the smaller. After all. In the long term. If one of them reduces their price again. price wars are good for consumers. however well run. The risk is real—and universal. and then others will lower their prices to match. In the short term. more marginal. who can take advantage of lower prices.

Thus pricing is very important in marketing. The competition may be forced to follow suit if its products are similar. As prices get lower the quantity of sales increases and customers receive the benefits. DEFINITION OF PRICING WAR Pricing is the process of determining what a company will receive in exchange for its products.investopedia. the rest being cost centers. promotion. Pricing is also a key variable in microeconomic price allocation theory.2.investopedia. competitive rivalry accompanied by multi-lateral services of price reduction.com/terms/p/pricewar. Eventually. combination of multiple orders or lines.asp#ixzz2IK2rKJIP) Investopedia explains 'Price War' When a company wants to increase market share. Pricing is the manual or automatic process of applying prices to purchase and sales orders. a price point is reached that only one company can afford. The needs of the consumer can be converted into demand only if the consumer has the willingness and capacity to buy the product. price prevailing on entry. market condition. specific vendor quote. and quality of product. competition. which increases product sales. quantity break. A price war may be used to increase revenue in the short term or as a longer term strategy to gain market share. Pricing is a fundamental aspect of financial modeling and is one of the four Ps of the marketing mix.( source: http://www.(source: http://www. Pricing factors are manufacturing cost. 4 . or even communication with competitors. market place. promotion or sales campaign. based on factors such as: a fixed amount. and place. Price is the only revenue generating element amongst the four Ps. and many others. The other three aspects are product. Some companies will even sell at a loss in an attempt to eliminate the competition completely. shipment or invoice date.com/terms/p/price-war. usually the easiest way is to reduce prices. Automated systems require more setup and maintenance but may prevent pricing errors. Price wars can be prevented through strategic price management (with non-aggressive pricing). thorough understanding of the competition. The pricing war situation is when companies continuously lower prices to undercut the competition.asp#ixzz2IK386Gse) Price war: Term used in economic sector to indicate a state of intense.

CAUSES OF PRICING WAR The main reasons that price wars occur are: • • • • • Product differentiation: Some products are. Because there is little to choose between brands. commodities. 2. Penetration pricing: If a merchant is trying to enter an established market. Bankruptcy: Companies near bankruptcy may be forced to reduce their prices to increase sales volume and thereby provide enough liquidity to survive. 5 .2 Pricing Mistakes Many companies make common pricing mistakes.1 Penetration Pricing Penetration pricing is the pricing technique of setting a relatively low initial entry price. The strategy works on the expectation that customers will switch to the new brand because of the lower price.2. new processes may make it cheaper to make the same product. price is the main competing factor. Oligopoly: If the industry structure is oligopolistic (that is. has few major competitors). Similarly. to attract new customers. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. it may offer lower prices than existing brands. Process optimization: merchants may incline to lower prices rather than shut down or reduce output if they wish to maintain the economy of scale. often lower than the eventual market price. Bernstein's article "Supplier Pricing Mistakes" outlines several which include: • • • • • • Weak controls on discounting Inadequate systems for tracking competitor selling prices and market share Cost-Up pricing Price increases poorly executed Worldwide price inconsistencies Paying sales representatives on dollar volume vs. or at least are seen as. addition of profitability measures 3. the players will closely monitor each other's prices and be prepared to respond to any price cuts. rather than to make profit in the short term.

this can soon mean customers lose confidence and a subsequent a loss of sales.1 Experience of price war in telecom industry in Rwanda The recent experience in Rwanda with respect to market failure was about what many qualified a price war through extended promotions and in some cases misleading advertisements . Too often. 6 .2 Situation and reaction to price challenge and pricing war The first reaction to a price reduction should always be to consider carefully. Competitors: A competitor might target a product and attempt to gain market share by selling its alternative at a lower price.• • Predatory pricing: A merchant with a healthy bank balance may deliberately price new or existing products in an attempt to topple existing merchants in that market. reaction is to match the competitor's move. If this route is to be chosen it is as well to make the move rapidly and obviously . Split the market: Branch one product into two. 3.not least to send signals to the competitor of your intention to fight. and most popular. • • Maintain price: Another reaction is to hope that the competitor has made a mistake. Has the competitor decided upon a long-term price reduction? Is this just a short-term promotion? If it is the latter. Complaints were received from operators with respect to endless promotional tariff from their competitors and from consumers with regards to misleading advertisements. The reaction of RURA was to set up a coercive conduct/behavorial regulations early this year to supplement the existing structural and incentive regulation. but if the competitor's action does make inroads into a merchant's share. Some argue that it is better to introduce a new rival brand instead of trying to match the prices of those already in the market 3. then the reaction should be that relating to short-term promotional activity and the optimum response is often simply to ignore the challenge. price wars have been started because simple promotional activities have been misunderstood as major strategic changes • Reduce price: The most obvious. REACTIONS TO PRICE CHALLENGES 3. selling one as a premium and another as a basic. This maintains the status quo (but reduces profits pro rata).

Paraguay and Colombia and in Africa TIGO is in Senegal.rw The brand Tigo was created and commercially launched in Latin American operations in 2004. Chad. Tanzania.3. 3 in Central America. Tigo has an emerging market focus. Other tactics can be used to great effect: improved quality. As a brand in Africa.1 Tigo Cuts Prices Top Attract New Subscribers and Rwanda coverage Tigo is a Multi National Telecommunications Company. In South America TIGO is in Bolivia. 3. It has Mobile Telecommunications Operations in 13 countries. Tigo has been here since 2006.3 Rwanda situation on pricing war in Tigo Company 3.Rwanda's newest mobile 7 . 3 in South America and 7 in Africa. Ghana.Reducing price is not the only weapon. Currently TIGO has 31 million subscribers across all of these regions. increased promotion (perhaps to improve the idea of quality). TIGO Rwanda Coverage Map from www. Mauritius and Rwanda.• React with other measures .tigo. the Democratic Republic of Congo (DRC).

igniting a price war in the industry. the initiative was probably spur sign-ups among existing mobile phones users. buying additional SIM cards to take advantage of the lowest rates. Experts say that Tigo’s launch with favorable per second call rates has already pushed rivals MTN and Rwandatel into panic. Rwandatel has been in the news following revelations that it is technically insolvent. has launched a promotion that cuts the cost of on-network calling. MTN’s promotion came days after Tigo 8 .3 MTN locks horns with Tigo in new round of data price wars Two of Rwanda’s telecom sector operators have locked horns in price wars within the data segment in what have been seen as further realignments unfolding within the rapidly changing sector. So.operator. a subsidiary of Millicom International Cellular has started its operations in Rwanda promising to offer the cheapest call tariffs on its per second billing platform.3. 3. the entry of TIGO came as an opportunity for subscribers to receive innovative products and services that linked Rwanda to the world through data access. 3.2 Price wars loom as Tigo launches Tigo. voice access and other means of access in a healthy competition. Tigo. Tigo said that its tariffs were not an advertisement avenue. Whereas the MTN and Rwandatel charges were seen as promotional services. A cut-throat price war has started to significantly trim-down call and mobile internet tariffs.3. The price jostling comes at a time when the data incumbent. Although low prices for on-network calls might not appear to be all that attractive in a new operator with a small customer base. Tigo’s entry into Rwanda has broken the longstanding duopoly enjoyed by MTN Rwanda and Rwandatel. Part of the price wars by both operators has been seen through the launch of promotional packages involving lower mobile internet prices. and competition in the mobile space has started to intensify with all the three GSM operators vying for market share.

3. Tigo runs a Rwf10 per minute promotion on Tigo to Tigo calls. There are five packages to choose from”.Rwanda launched its data promotion dubbed “SmartBrowse”. The price movements havebeen seen as one of the key value drivers for penetration rates in tandem with RURA aspirations for the sector to hit six million subscribers by 2012.5 GB offer.php?i=14251&a=28777) 9 . Further still.newtimes. a weekly solution can be accessed that comes with 1. if the subscriber wants a package that lasts more than a day. “The bigger the package.5GB of browsing. the third national operator’s entry into the local telecoms market has hyped intense price wars between the sector operators. 3.co. Rwanda’s telecom operators are enticing their clients with discount structures that reach an all time high of 90 percent. The fierce price war that is raging has left consumers as the major beneficiaries. Rwandatel has ‘Nukupe’ charged at Rwf 0. The Tigo offer price ranges from Rwf 125 for a one day 5MB solution to a Rwf 10.rw/news/index.69 per minute or Rwf500 talk time for 12 hours on Rwandatel to Rwandatel calls. MTN has ‘MTN’ Zone which is a unique offer based on a caller’s location with the highest offer set at 90 percent. These huge discounts are applied to varied standard tariffs by the operators. the bigger the discount.000 a week 1. (source: http://www. Tigo further said that the new packages can be used by any platform or device be it a mobile smart phone.4 Tigo’s entry sparks off an intense telecom price war Mobile Tigo Rwanda. By press time the combined subscriber levels for the three players stood at just below three million—less than half of RURA’s penetration targets by 2012. It is the various discount structures by the three operators that have largely defined the tone and pitch of the price wars in the telecom sector. a statement from Tigo to Business Times says adding that. Tigo users can save up to 70 percent of their surfing expenditure depending on which package they choose. In the offer. “ each of them provides a different amount of megabytes that suit the customer’s browsing needs”. or modem on a client’s laptop or even an i-pad. customers are spoilt for choice through cash bonanzas and other attractive incentives. In the Tigo offer.

” Tigo’s parent company has also signed a global agreement with Western Union and the partnership has already been put to work in its Latin American Tigo operations. TIGO Rwanda. merchants find that they can not gain profit if they cut the price further— so the sticky price remains.3. tend not to vary much between them. began the mobile money payment platform mid-last year and has since registered over 260. Rwandan telecommunication operators have now locked horns in Mobile Money Transfer. the battle has been shifted to mobile money services. other players will merchants will follow suit if they can. Price stickiness is extremely common among large supermarket chains and prices. as they try to cash in the rapidly changing sector.3. Many of the supermarkets monitor price changes in other supermarket chains and vary their prices accordingly until they reach the point where any further decrease in their price will affect profits. but it is advice which may not always be taken if the benefits seem attractive (which they may also be to competitors). At some point. Competition among the country’s telecom firms has been tense over the past year.000 subscribers with 700 agents operating across the country. 10 .5 Rwanda: Telecom Companies Battle Shifts to Money Transfer As telecoms carry on to explore avenues to beat competition in both subscription numbers and revenue volumes. a customer can be able to send and receive money. But if the price falls. a subsidiary of Luxembourg based Millicom International Cellular.the later (airtime and cash power) are absolutely free of charge. “With Tigo Cash. So the merchant will lose its market share to its competitors on lower prices. buy airtime and also purchase cash power. with a price war waging. especially for commodities. Price stickiness In an oligopoly markets prices can become 'sticky' because if the price rises. competitors will not follow the rise. AVODING PRICE WAR Avoidance is by far the best policy.

coverage and rollout plan and quality of services. and whether the tariff regime in use needs modification or rescission. Restrictions on comparative advertising. This contradicts MTN Rwanda’s disclosure that its revenue dropped in 2010 due to increased price competition. despite continuing cuts to call tariffs. and should be made only after careful review and thorough input from all stakeholders.ROLE OF RURA IN ADDRESSING PRICING WAR Rwanda Utilities Regulatory Agency (RURA) says it expects telecoms firms to continue generating high revenues and boost government taxable income from the telecoms sector. 4. the telecoms regulator has issued an enforcement notice to fixed-line incumbent Rwandatel for noncompliance with its license obligations regarding investment plan. related to the ongoing telecoms price war. BMI is convinced Rwandatel's network investment shortfall is. The limitation of duration and number of promotions per year. 5. Sanctions 11 . RuRa set up a coercive conduct behavior regulation. These regulations address the following main issues: 1. RURA periodically reviews and makes decision regarding whether specific existing tariffs are still appropriate. The obligation to submit to the regulator the promotional tariffs with detailed explanations. Such decisions must not be made impulsively. Meanwhile. Minimum standards and requirements for promotion 2. in part. To clearly define the services to be promoted and 6. 3.

google. interconnection.. http://www. http://www.rw 4.…and the conduct behavior which consisting on change behavior of the firm combat anti-competitive behaviors ex: refusal to deal. For protection of consumer Regulator (RURA) role is to conduct a structural regulation which is the functional influence market example number of license.com 12 .rw 3. http://www.rw 6.com 2.co.newtimes.com 5. http://www. The price war has been successful in at least partially destabilizing MTN’s overwhelmingly dominant position.gov.. Market forces is the way to see that the regulator ensure that what is happening is happening within the law. http://www.tigo. I recommend that the RURA has to regulate regular the prices as usual but also to be concerned with the quality of services which customers paid for. http://www. REFERENCES 1. price predatory.investopedia.rura. price discrimination.RECOMMENDATION AND CONCLUSION Telecommunication is a free market and lying a floor will mean you are doing price control.wikipedia.

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