Telecommunications tariffs
Encyclopedia
A telecommunications tariff is an open contract between a telecommunications service provider and the public, filed with a regulating body such as a Public Utilities Commission
. Such tariffs outline the terms and conditions of providing telecommunications service to the public including rates, fees, and charges.
. Obviously, if a telecommunications operator cannot recover its costs, it will make a loss and the company will go bankrupt. Tariffs must also be used to cover maintenance
, additional research
and other indirect costs associated with providing the service. However, telecommunications service providers must be careful not to over-price each service, as prices have a direct influence on demand for that service (see supply and demand
). Such an operator must constantly balance the need to provide cheaper rates, especially if there is strong competition
, with the cost of maintaining the service at an optimum quality that is acceptable to the customer. If an operator charges too much, it risks alienating its customers, resulting in a loss of traffic and therefore revenue; if they charge too little, they will have insufficient capital to maintain the network's Quality of Service
. Over time this will result in customer attrition
.
These components form a basic tariff system but there are much more complex versions in existence too. For example, there is generally a connection fee to connect a new user to the network
.
Usually there is the option of calling collect (in the UK
known as reversing charges), where responsibility for charges normally paid by the caller is accepted by the recipient.
Tariffs also depend on the bandwidth provided. For example, dial-up modem
connections are charged at normal telephone
costs, but connections such as DSL
are usually charged using a completely different accounting system due to their always on nature.
Emergency calls
can invariably be made without charge.
Most countries have a number sequence that enable the caller to make calls without charge, sometimes known as free calls or freephone, these are usually used by companies for their sales line (in the UK these are 0800 and 0808 numbers).
Tariffs substantially in excess of the normal rate, known as premium rate
, are used for information services, competition entries and pornography
calls.
, this means that the demand for call minutes varies greatly according to price. A slight decrease in price leads to a great increase in call minutes. The higher the price, the more this effect is noticeable, for both business and residential customers on international or local calls. This means that it is often the case that more revenue is achievable at lower prices, that is, E < -1.
Internet traffic research show that the traffic intensity is directly affected by the tariffs charged in connecting customers to their Internet Service Provider
(ISP). For example, a circuit-switched network provider charges different tariffs at different times of the day. It was noted that at the time that the rates decreased, the traffic intensity logged by the ISP increased dramatically and then decayed over time at an exponential rate. The conclusion of the research was that by varying prices over time, a telecommunications service provider can reduce the level of the traffic intensity at peak periods, resulting in lower equipment costs because of the reduced need to provision to meet peak demand, which in turn leads to increases in long-term revenue and profitability. See Time-based pricing
.
Public Utilities Commission
A Utilities commission, Utility Regulatory Commission , Public Utilities Commission or Public Service Commission is a governing body that regulates the rates and services of a public utility...
. Such tariffs outline the terms and conditions of providing telecommunications service to the public including rates, fees, and charges.
Why are tariffs charged?
At a minimum, tariffs imposed must cover the cost of providing the service to the consumer. The consumer may be the final user or an intermediary such as a service providerService provider
A service provider is an entity that provides services to other entities. Usually, this refers to a business that provides subscription or web service to other businesses or individuals. Examples of these services include Internet access, Mobile phone operators, and web application hosting...
. Obviously, if a telecommunications operator cannot recover its costs, it will make a loss and the company will go bankrupt. Tariffs must also be used to cover maintenance
Maintenance, Repair and Operations
Maintenance, repair, and operations or maintenance, repair, and overhaul involves fixing any sort of mechanical or electrical device should it become out of order or broken...
, additional research
Research
Research can be defined as the scientific search for knowledge, or as any systematic investigation, to establish novel facts, solve new or existing problems, prove new ideas, or develop new theories, usually using a scientific method...
and other indirect costs associated with providing the service. However, telecommunications service providers must be careful not to over-price each service, as prices have a direct influence on demand for that service (see supply and demand
Supply and demand
Supply and demand is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers will equal the quantity supplied by producers , resulting in an...
). Such an operator must constantly balance the need to provide cheaper rates, especially if there is strong competition
Competition
Competition is a contest between individuals, groups, animals, etc. for territory, a niche, or a location of resources. It arises whenever two and only two strive for a goal which cannot be shared. Competition occurs naturally between living organisms which co-exist in the same environment. For...
, with the cost of maintaining the service at an optimum quality that is acceptable to the customer. If an operator charges too much, it risks alienating its customers, resulting in a loss of traffic and therefore revenue; if they charge too little, they will have insufficient capital to maintain the network's Quality of Service
Quality of service
The quality of service refers to several related aspects of telephony and computer networks that allow the transport of traffic with special requirements...
. Over time this will result in customer attrition
Customer attrition
Customer attrition, also known as customer churn, customer turnover, or customer defection, is a business term used to describe loss of clients or customers....
.
Components of tariffs
Tariffing systems vary from country to country and company to company, but in general they are based on several simple principles. Tariffs are generally made up of two components:- Standing charges: these are fixed charges that are used to pay for the cost of the connection to the nearest exchange and the equipment to monitor that customer's phone line or service connection. They are usually paid on a monthly basis, and called rental.
- Call charges: these charges are variable and are used to pay for the cost of the equipment to route a call from the caller's exchange to the recipient's exchange. These call charges can be calculated on a fixed per call basis, a variable basis depending on the time or distance of the call, or a combination of the two. Call charges can even vary at different times of the day. For many local calls the charge is zero; see flat rateFlat rateA flat fee, also referred to as a flat rate or a linear rate, refers to a pricing structure that charges a single fixed fee for a service, regardless of usage. Rarely, it may refer to a rate that does not vary with usage or time of use...
.
These components form a basic tariff system but there are much more complex versions in existence too. For example, there is generally a connection fee to connect a new user to the network
Telecommunications network
A telecommunications network is a collection of terminals, links and nodes which connect together to enable telecommunication between users of the terminals. Networks may use circuit switching or message switching. Each terminal in the network must have a unique address so messages or connections...
.
Usually there is the option of calling collect (in the UK
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
known as reversing charges), where responsibility for charges normally paid by the caller is accepted by the recipient.
Tariffs also depend on the bandwidth provided. For example, dial-up modem
Modem
A modem is a device that modulates an analog carrier signal to encode digital information, and also demodulates such a carrier signal to decode the transmitted information. The goal is to produce a signal that can be transmitted easily and decoded to reproduce the original digital data...
connections are charged at normal telephone
Telephone
The telephone , colloquially referred to as a phone, is a telecommunications device that transmits and receives sounds, usually the human voice. Telephones are a point-to-point communication system whose most basic function is to allow two people separated by large distances to talk to each other...
costs, but connections such as DSL
Digital Subscriber Line
Digital subscriber line is a family of technologies that provides digital data transmission over the wires of a local telephone network. DSL originally stood for digital subscriber loop. In telecommunications marketing, the term DSL is widely understood to mean Asymmetric Digital Subscriber Line ,...
are usually charged using a completely different accounting system due to their always on nature.
Special tariffs
Increasingly, in some countries, the call charges are fixed at a monthly rate and included as a supplement to the standing charges, known as inclusive calls.Emergency calls
Emergency telephone number
Many countries' public telephone networks have a single emergency telephone number, sometimes known as the universal emergency telephone number or occasionally the emergency services number, that allows a caller to contact local emergency services for assistance. The emergency telephone number may...
can invariably be made without charge.
Most countries have a number sequence that enable the caller to make calls without charge, sometimes known as free calls or freephone, these are usually used by companies for their sales line (in the UK these are 0800 and 0808 numbers).
Tariffs substantially in excess of the normal rate, known as premium rate
Premium-rate telephone number
Premium-rate telephone numbers are telephone numbers for telephone calls during which certain services are provided, and for which prices higher than normal are charged. Unlike a normal call, part of the call charge is paid to the service provider, thus enabling businesses to be funded via the calls...
, are used for information services, competition entries and pornography
Pornography
Pornography or porn is the explicit portrayal of sexual subject matter for the purposes of sexual arousal and erotic satisfaction.Pornography may use any of a variety of media, ranging from books, magazines, postcards, photos, sculpture, drawing, painting, animation, sound recording, film, video,...
calls.
Impact of tariffs on traffic
Call minutes are highly elastic against pricePrice elasticity of demand
Price elasticity of demand is a measure used in economics to show the responsiveness, or elasticity, of the quantity demanded of a good or service to a change in its price. More precisely, it gives the percentage change in quantity demanded in response to a one percent change in price...
, this means that the demand for call minutes varies greatly according to price. A slight decrease in price leads to a great increase in call minutes. The higher the price, the more this effect is noticeable, for both business and residential customers on international or local calls. This means that it is often the case that more revenue is achievable at lower prices, that is, E < -1.
Internet traffic research show that the traffic intensity is directly affected by the tariffs charged in connecting customers to their Internet Service Provider
Internet service provider
An Internet service provider is a company that provides access to the Internet. Access ISPs directly connect customers to the Internet using copper wires, wireless or fiber-optic connections. Hosting ISPs lease server space for smaller businesses and host other people servers...
(ISP). For example, a circuit-switched network provider charges different tariffs at different times of the day. It was noted that at the time that the rates decreased, the traffic intensity logged by the ISP increased dramatically and then decayed over time at an exponential rate. The conclusion of the research was that by varying prices over time, a telecommunications service provider can reduce the level of the traffic intensity at peak periods, resulting in lower equipment costs because of the reduced need to provision to meet peak demand, which in turn leads to increases in long-term revenue and profitability. See Time-based pricing
Time-based pricing
Time-based pricing refers to a type offer or contract by a provider of a service or supplier of a commodity, in which the price depends on the time when the service is provided or the commodity is delivered. The rational background of time-based pricing is expected or observed change of the supply...
.
Further reading
- OECDOrganisation for Economic Co-operation and DevelopmentThe Organisation for Economic Co-operation and Development is an international economic organisation of 34 countries founded in 1961 to stimulate economic progress and world trade...
, Universal Service and Rate Restructuring in Telecommunications, Organisation for Economic Co-operation and Development (OECD) Publishing, 1991. ISBN 9264134972