AT&T said earlier this week that it will add a new administrative fee to each of its wireless subscribers’ monthly bills. The fee is only $0.61, which doesn’t sound like much, and an AT&T spokesperson was quick to point out to several news sites that this new fee is lower than similar fees charged by rival carriers. Subscribers were still outraged. Now that the shouting has died down a bit, however, people are looking for a batter explanation for the new charge they’ll see each month. According to one industry watcher, that explanation couldn’t be simpler: “Because they can.”
“Why would AT&T do this? Because they can, and it is all in the pricing strategy,” Joe Hoffman, principal analyst at ABI Research wrote in a post on the company’s blog. “Now that AT&T is comfortable with their shiny new pricing tools and flexibility that comes with them, looks like someone in the Executive MBA program has discovered Price Elasticity of Demand.”
Hoffman explained that AT&T has almost nothing to lose by adding this new fee — $0.61 per month is unlikely to scare many people away — and everything to gain. As a matter of fact, in one fell swoop, AT&T just added between $500 million and $600 million in revenue to its bottom line.
“Why 61¢, why not $1 or $5 or $10? Because AT&T understands price elasticity of demand,” Hoffman wrote. “When AT&T raises the price by 61¢, they know hardly anyone is going to bail on them, and so can impose this with impunity. $1 or $5 or $10 is just too much to swallow all at once, but give them time. For now, $500 – $600 Million will flow right to the bottom line. Brilliant! No fancy software tools, no focus groups, no high priced engineers and programmers, and no iPhone subsidies. Just a raw, brute force price increase.”
The analyst noted that AT&T subscribers may see this fee increase by a small amount in six to nine months, again adding millions to AT&T’s revenue without scaring many customers away.