overview of existing and possible

Tariff Models for Telecommunication Services

in a Liberalised Market

pricing strategies for the most important telecommunication services: voice

communication over fixed networks,
mobile communication and Internet
communication. Section 4 provides a

by Katarina Stanoevska-Slabeva, mcm institute, University St. Gallen, Switzerland

summary and an overview of possible

future scenarios for pricing of telecommunication services.

1 Introduction

resource allocation on Internet based

The liberalisation of the telecommuni-

(Walker et al, 1997), (Gupta et al, 1997).

on the prevailing flat-rate tariff model

2 Definition and Classification

of Tariff Models for Telecommunication Services

cation market in many countries has

This trend is further encouraged by the

marked a fundamental change in busi-

growing possibility of sophisticated

In every day life we understand under

ness practices of telecommunication

networks based on ATM technology to

the word tariff to be the price for tel-

providers. We have witnessed a steady

support variation of bandwidth and

ecommunication services. This word

decline in telecommunication prices in

the measurement of the usage of net-

is furthermore used interchangeably

countries with liberalised markets. The

work resources (Anania et al, 1995).

with the words rate and price. In this

change is also marked by experiments

Finally, in the new competitive environ-

paper we distinguish between tariff

with new tariff models.

ment, service providers are constantly

model and price. Thus, in order to pre-

under pressure to find new ways of

vent misunderstanding first the basic

Before deregulation, tariff models, i.e.

positively differentiating themselves

terms will be defined.

calculation schemas and pricing for

from their competitors. One competi-

telecommunication services were influ-

tive advantage could be the introduc-

We define a tariff as a scheme of rates

enced by national monopoly supply,

tion of new tariff models.

and regulations governing the charging of telecommunication services. A

social objectives, certain competitive

As a result of the developments

specific tariff model consists of two

rather less influenced by hardware and

described above, the introduction of

components:

software progress and innovation or

new tariff models might be consid-

a monetary component called price

and customers pressure, and they were

and

international consensus regarding cost

ered as one possible future scenario

allocation methodologies (Gupta et al,

for the development of the telecommu-

a related tariff model, i.e. a calcula-

1997). As a result, there was one tariff

nication market (Williams, 1997). This

tion schema, which clearly delimits

model for specific services (for exam-

could affect all players in the market

the unit for which the given price is

for telecommunication services the

valid and provides a charging func-

pricing for telephone services based

consumers, service providers, network

tion which governs the calculation

on time of usage and distance), which

operators and producers of equipment,

of costs. For example prices for

ple Ramsey pricing, i.e. differentiation

made telecommunication costs trans-

i.e. of hardware and software for net-

voice communication are defined

parent and predictable.

work operation and management.

per time unit of active usage of the

The liberalisation of the telecommu-

The aim of this paper is to provide an

www.mediajournal.org

network, whereby the time units

are priced differently according to

nication market in many countries,

overview of existing tariff models, to

distance, time of the day and type

the convergence of infrastructure, the

describe experiments made during lib-

of customer.

emergence of new services such as

eralisation, as well as to describe pos-

interactive TV and particularly the

sible future scenarios for pricing strate-

In theory numerous tariff models

explosion of Internet usage has given

gies based on related research.

have been proposed for telecommuni-

new tariff models in a liberalised

The content is structured as follows:

important categories of tariff models

market. The pressure to introduce

First in section 2, tariffs are defined

will be described in more detail in

new tariffs for telecommunication serv-

and the most important tariff models

accordance with (Mitchell and Vogel-

ices has also resulted from inefficient

are explained. Section 3 provides an

sang, 1991).

cation services. Following, the most

rise to a broad discussion of possible

JMM Vol. 3 No. 1 2001

33

2.1 Typology of Tariff Models

The above mentioned tariff models

charge is a special network function,

can, furthermore, be combined with a

which allows notification of charges

Tariff models are basically classified in

fixed or changeable price per defined

before, during and immediately after a

three groups: linear tariff-models, non-

unit. In the first case we have static

call. AOC is the prerequisite for online

linear tariff models and discounts.

tariff models and in the second case

and real-time charging. It is already

we have dynamic tariff models (Morris

applied in case of calls from public

Linear Tariffs are based on an equal price

and Verus, 1999). Static tariff models

phone cabins or prepaid cards.

per defined unit of usage and comprise

are all linear tariff models. Examples

usage based pricing and Ramsey pric-

of dynamic tariff models are the

ing. In usage based pricing the revenue

block dynamic tariff and the discrete

3 Prevailing Tariff-Models
for Telecommunication
Services

depends on the quantity, i.e. number of

dynamic tariff, where the price per

units sold. Total cost of a call or trans-

unit is increased or decreased during

mission is calculated by a multiplica-

the transmission once a set amount of

In this chapter the prevailing tariff

tion of the unit price with the number

used units is reached.

models for the most important telecommunication services as voice com-

of units used. Usage based tariff models

differ with respect to what is defined

Discounts are a special type of tariff

munication, mobile communication

as the basic unit of usage. For telecom-

model. While the above described tariff

and Internet will be described.

munication services, the unit of usage

models are applied in order to calcu-

might be: time of usage, volume trans-

late the cost of each call or transmis-

ferred, and allocated bandwidth.

sion, discounts are applied to decrease

the total cost for the customer. They

Ramsey pricing or differentiation pric-

are defined as a percentage of total

3.1 Prevailing Tariff Models

and Pricing Strategies
for Voice Communication
over Fixed Phone Networks

ing is a special linear tariff, where dif-

costs, which is deducted at the end of

ferent prices are charged for essentially

the billing period. They can be defined

Before liberalisation, voice communica-

the same service, i.e. for a defined unit of

over total costs incurred for a special

tion was charged based on a two part

usage. The prices can be differentiated

type of transaction or on total costs

tariff model consisting of:

according to customer type (for example

incurred for a certain period of time.

A fixed monthly access fee and

private and business customer), time of

Discounts are applied in combination

Ramsey pricing for defined time

the day, distance of the call, etc. For fur-

with tariff models and result in an

units of network usage. Prices were

ther examples of differential pricing and

additional reduction of prices.

differentiated according to type of

customer, distance of the call, time

its economic aspects see (Varian, 1996).

Non-Linear tariffs result in different

2.2 Charging and Billing

of Telecommunication Services

of the day and day in the year (holidays and working days).

prices per used unit. The best known

and simplest non-linear tariff is flat

Tariffs are used in order to calculate the

Against this background new providers

rate (McKnight et al, 1997). With this

total cost for a telecommunication serv-

of telecommunication services applied

model, the customer pays a fixed price

ice used by the customer. Thus, they pro-

the following pricing strategies (Sta-

for a certain period of time, regardless

vide the base for charging and billing of

noevska-Slabeva, 2000): the Ramsey

of how much he uses the service. From

telecommunication services. Charging

pricing part of the former monopo-

the customers point of view, the abil-

is the process of determining the total

lists two-part tariff model. The new

ity to budget for that service may be an

cost for telecommunication services for

entrants also tried to differentiate

advantage. The service provider also

a certain period of time. Billing is the

themselves and to attract customers by

saves costs, as no measurement related

process of notifying the customer about

remarkably lowering prices when compared to the prices of the incumbent.

Most entrants used the percentage

combining linear and non-linear tariff

Charging can take place in two ways 1)

the incumbent as a major marketing

models to complex tariff-models. One

on a regular basis for an agreed upon

slogan.

of reduction against the price of

Further tariff models can be defined by

such example is the Two-Part Tariff

period of time (for example monthly

which consists of a fixed entrance fee

or quarterly) or 2) during the call.

for a certain period of time and Ramsey

In the second case, we are talking

Ramsey pricing, they tried to differen-

Pricing for used units.

about advice of charge (AOC). Advice of

tiate by changing some of the param-

34

JMM Vol. 3 No. 1 2001

Even though new entrants adopted

www.mediajournal.org

the charges and the legal require for

payment.

to charging is required.

Figure 1: Comparison of tariff times on the example of Sunrise and Swisscom (Stanoevska-Slabeva, 2000)
0
a.m.

6
a.m.
Night

8
a.m.
Low

Low

Normal
8
a.m.

SUNRISE

10
p.m.

Low
5
p.m.

12
p.m.
Night
Night
11
12
p.m. p.m.

eters of these calculation schema. In

Free phone communication, which

tions. Prepaid cards apply Ramsey pric-

particular each entrant tried to define:

is financed with advertising. With

ing, i.e. a linear tariff for usage and

this model, the customer does not

advice of charge as the cost of each

pay for the services, but has to listen

call is deducted from the amount on

different time units, for which prices

were defined,
different time intervals as peak and

to advertisements during his call.

the card. Even though price per unit is

off-peak intervals with different

This experiment was conducted in

higher as it includes a portion of the

prices. (see for example the strate-

the German market. Even though

fixed fee, prepaid cards are popular

gies of two Swiss companies Sunrise

there were a sufficient number of

as they enable an easy control of total

and Swisscom provided in figure 1).

interested customers for the free

costs for communication and do not

service, it was not rolled out after

require a check of the creditworthi-

As a further differentiation strategy

the test phase because there were

ness of the customer. Prepaid cards are

of new providers, numerous discount

not enough interested parties, who

especially interesting for young people

models have to be mentioned. Exam-

wanted to advertise over the phone.

with limited budgets for communica-

ples of discount models include:

discounts on costs for calls to one

tion.
The above described developments

or several predefined domestic and

resulted in significantly lower prices

New tariff models will be necessary

international telephone numbers or

for telecommunication services, but

with the introduction of third genera-

countries,

also increased the opaqueness of the

tion (3G) digital packet-switched broad-

discounts on costs for calls to cer-

market. The providers with their numer-

band mobile networks, such as Gener-

tain telephone numbers with the

ous tariff times and time units cause

alised Packet Radio Service (GPRS) and

highest monthly turnover,

confusion for the consumer.

Universal Mobile Telecommunications

volume discounts on total costs

occurred during a given period of
time (for example monthly).

System (UMTS). GPRS is seen as the first

3.2 Prevailing Tariff Models

and Pricing Strategies
for Mobile Communication

The discount rates and the strategies

www.mediajournal.org

5
p.m.

Normal

Night
0
a.m.

SWISSCOM

step towards UMTS and is currently

being established in several European
countries. These technologies enable
an always on connection to the Inter-

for which kind of calls discounts are

With respect to applied tariff models,

net and hence one that will permit

offered differ from provider to pro-

the same observations can be made in

charges to be levied per packet sent,

vider. Private and business customers

mobile communication as with voice

i.e. based on the volume of received or

are treated differently as well.

communication. Before liberalisation,

send data (Curwen, 2000). Given the

mobile communication was priced

different volume-based tariff models

Besides the above described European

with a two part tariff, consisting of a

prevailing currently on the market

developments, the following pricing

fixed monthly access fee and Ramsey

for business customers of Internet

strategies and experiments have to be

pricing per time unit of usage. The

described in more detail in the next sec-

mentioned:

same tariff model is also used after lib-

tion, scenarios for volume-based pric-

Application of flat-rate for local calls

eralisation, but again with a redefini-

ing of mobile services are expected.

in the USA. This pricing strategy led

tion of basic parameters.

to higher communication traffic in

the USA, when compared to Europe,

With the introduction of 3G mobile

Another important change is the grow-

networks, new pricing paradigms will

and also fostered Internet adoption

ing importance of advice of charge and

be applied for mobile communication,

and usage.

prepaid cards for mobile communica-

which might pose a serious obstacle for

JMM Vol. 3 No. 1 2001

35

the adoption of the technology. Exist-

a detailed description see Stiller et al.,

2. Auction based allocation

ing experiences in pricing of telecom-

2000) and the JANET in Britain. The

of Internet resources.

munication services show that the cus-

experiences with usage based pricing

tomer is used to and prefers simple

show, that these tariff model affects

tariff models such as flat rate (Odlyzko,

usage intensity (Odlyzko, 2000), (Stiller

duced by MacKie-Mason and Varian

2000) and that volume based tariff

et al., 2000).

(1995) and is known under the name

Another variant of volume-based charg-

the prices for services are determined

models can considerably influence

usage (see also the volume-based tariffs

The idea of auction pricing was intro-

smart market approach. With auctions,

for the Internet services in the next

ing, that seems to have become popu-

based on consumer bids. The basic idea

section).

lar recently is a Bursty rate, where the

is, that each packet contains a bid, and

3.3 Prevailing Tariff Models

and Pricing Strategies
for the Internet

Internet Service Provider periodically,

if it is served, pays a clearing price

e.g. every hour, measures the volume

given by the highest bid among pack-

of data transferred over the connec-

ets which are denied service. Thus,

tion. For each charging interval, e.g.

each node in the network becomes an

a month, all samples are sorted by

efficient market. Another approach

Prevailing tariff models and pricing

volume. A fixed percentage of the high-

is the Progressive Second Price Auc-

strategies for Internet differ for the

est samples are discarded to eliminate

tion for Network Bandwidth Sharing

end-consumer and business market.

unusual peaks, and the highest remain-

proposed by Lazar and Semet (1999).

Before liberalisation, Internet access

ing sample is used to define the band-

Compared to the previous approach,

via telephone for private customers

width at which the connection is

this approach proposes auctioning of

was charged according to a two part

charged (Stiller et. al, 2000).

bandwidth, rather than auctioning

tariff model: a fixed monthly charge

based on individual packets. Available

for a certain amount of hours of usage

Due to congestion on the Internet in

bandwidth is split into small units, and

and a linear tariff for any additional

the late 1990s and equal quality of serv-

users bid for the required bandwidth

hour exceeding the hours included in

ice for all users there has been great

at each auction period. This approach

the fixed access fee. In addition, the tel-

controversy in science concerning the

generalises the idea of Vickrey auctions

ephone connection during the Internet

right pricing model for Internet. A sum-

the winner pays the price per unit

sessions is charged at the lowest local

mary of tariff models proposed by dif-

which is calculated from all players

tariff offered.

ferent researchers is given below:

bids, when each of them is weighted by

how much the allocation of that player

Due to the strong competition, pro-

1. Quality of Service (QoS) based

is decreased by the existence of their

viders were constantly increasing the

pricing.

bid.

One interesting example of QoS-based

All auction based approaches for

number of hours included in the fixed

monthly charge, which was a clear
trend towards a flat rate. At present,

charging is the Paris Metro Pricing

resource allocation and price determi-

there are many providers in Europe

model proposed by (Odlyzko, 1999),

nation show an often cited drawback

offering a flat-rate or free Internet,

(see also Fishburn and Odlyzko, 1998).

of a lack of price transparency and pre-

which is similar to the situation in the

Under this approach the network is

dictability. This results in problems

USA.

divided into different logical subnet-

for communication budget definition.

works, each of them handling packets

In addition, auction-based pricing

on the best-effort base, but charging

requires adoption of the technology

Compared to the end-customer market

for Internet access, the market for busi-

different prices for them. This is an

and hardware. Due to the these draw-

ness customers is basically priced by

analogy to the price system used in the

backs, it is not sure if auctions will be

subway of Paris, and it is to be expected

accepted by users. Relevant input with

countries, which have expensive lines

that a more expensive subnet will be

respect to this question is provided by

to the USA. One example, which is doc-

frequented less often and is hence

the INDEX project at Berkeley, which

umented in literature, are the univer-

able to deliver high-quality service, but

conducts experiments with static,

sity networks in Australia and New

without giving formal guarantees for

usage-based pricing schemes (Varian,

Zealand (Brownlee, 1995), (Carter and

that. Descriptions of other QoS based

1999).

Guthrie, 1995). Other examples are the

models can be found in (Stiller et al.

SWITCH network in Switzerland (for

2000).

36

JMM Vol. 3 No. 1 2001

www.mediajournal.org

volume-based tariffs, in particular in

3. Content-based pricing

fixed access fee and linear pricing

Can this trend of price decrease con-

per defined time unit spent online

tinue? What could be the future pric-

The concept of content-based pricing

for the end-consumer and volume-

ing strategies? The following future

was introduced by (McKie-Mason, Schen-

based pricing for business custom-

scenarios can be envisioned and are

ers.

explained shortly below:

ker and Varian, 1996). The authors dis-

The growing importance of advice

The opaqueness in the market

networks and content and application

of charge and various prepaid cards,

requires real time feedback for the

aware networks. The second type of

which are based on advice of charge

customer, i.e. advice of charge. AOC

is obvious

is currently available during the call

tinguish content and application blind

networks has the possibility for differ-

New kind of tariff models such as

and after the call, but AOC before

of content transported through the

bandwidth allocation by way of auc-

the call can increase the transpar-

network.

tions, bandwidth oriented pricing,

ency of the market and is attracting

QoS based pricing, usage based pric-

high attention.

entiation pricing based on the type

Another approach, which proposes

ing for transmitted volume instead

Another possible development is

pricing for differentiated Internet serv-

of time used or content-based pric-

the combination of different tariff

ices is the one proposed by Hartanto

ing have had an experimental char-

models for the same service. For

and Carle (1999). They propose an appli-

acter.

example in many countries early

cation architecture, which allows appliThe neglectance of possible tariff

during the week a two part tariff is

unit or volume based) for different serv-

models other than Ramsey pricing

used for voice communication and

ices (see also Semet et. al, 1999).

based on time used, can be explained

a flat rate during the weekend. Such

with the following reasons:

pricing strategies have remarkable

Due to the earlier monopoly, the

marketing effects.

4 Summary and Outlook

profit margins included in the

Application of different tariff models

Based on the findings described in the

prices of the incumbents were high

with respect to the offered service.

sections above the following conclu-

enough to provide a great opportu-

For example a common pricing

sions can be drawn:

nity for a price war. An aggressive

policy can be defined for several

The prevailing tariff model for voice

price policy is also a great marketing

services (for instance free Internet

communication is the two part

instrument and efficient for attack-

bounded to subscription to the pro-

tariff model consisting of a fixed

ing of new customers and for win-

vider).

entrance fee and Ramsey pricing for

ning market share.

Volume based tariff models for

a defined time unit of usage. Dif-

Discounts are also very efficient

ferentiation is usually performed

marketing instruments and enable

relevant latest with the introduc-

according to the type of customer,

individualised pricing without the

tion of GPRS networks.

mobile communication, will become

Tariff models based on QoS in par-

time of the day, distance and day of

necessity of introducing new equip-

the year. The Liberalisation of tele-

ment. This fostered their broad

ticular for applications demanding

communications markets has there-

usage.

high QoS.

Telecommunication services on offer

Application of different tariff models

have remained basically the same.

depending on the content transmit-

The basic differentiation strategy of

New services such as interactive TV,

ted and the used service.

new entrants was aggressive price

video on demand or broad usage of

policies. Another differentiation

video conferencing, which might

strategy of entrants was the redefini-

require high Quality of Service and

fore not yet led to an application of

new tariff models on a large scale.

www.mediajournal.org

attempts can be observed where

cation of various tariff models (time

tion of the parameters in Ramsey

bandwidth are still not in wide

pricing and the introduction of

use. As a consequence there is no

numerous discount models, which

demand for tariff models based on

resulted in great opaqueness of the

QoS or bandwidth allocation.

market.

The introduction of free access and

For Internet services the prevailing

flat rate for popular services such as

tariff models are free access, flat

the Internet is expected to increase

rate or a two part tariff model with

demand for voice communication.

JMM Vol. 3 No. 1 2001

37

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About the Author

Dr. Katarina Stanoevska-Slabeva (katarina.
stanoevska@unisg.ch) is currently working as
a lecturer and as a scientific project manager
of the research area Media Platforms and
Management at the Institute for Media
and Communications Management at the
University St. Gallen. Her research interests
are media platforms and telecommunication services, concepts for management of
media platforms and reference models for
component-based media.

Quality of Service, London, UK,

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