Price-sensitive consumers are not loyal to any brand

Kenyan telecommunication companies last week sent out messages informing their customers that they are increasing their rates across services to align with the increase in excise duty by five per cent.

Mobile phone firms, Safaricom #ticker:SCOM, Airtel Kenya and Telkom Kenya, increased their calls and messaging rates by 30 cents and 10 cents respectively. However, Safaricom increased their prices for mobile data bundles — fibre to to the buildings and fibre to the home — to reflect the new 15 per cent excise duty tax on internet services.

In order to ease consumers into the new prices and to celebrate its 18th anniversary, Safaricom launched a promotion called, 'Nawe Kila Wakati', running until December. It will see consumers make 18 minutes of voice calls daily for Sh18 and its home fibre customers will get 18 per cent when buying, renewing or upgrading their subscriptions next month.

Airtel and Telkom did not increase their price of mobile data bundles due to the excise duty. In fact, after the announcement, Airtel Kenya handed out free 4G sim cards in Nairobi estates such as Kasarani, which were initially Sh100, topped up with free 50mb data.

In addition to maintaining the prices for its bundle offerings, Telkom Kenya revised its voice bundle spacing them into four tiers, a move that will see consumers make calls for Sh1.50 cents per minute across networks.

“We are committed to deliver more value to our customers across the different segments and make sure that every bob counts through strategic investment and innovation,” said Aldo Mareuse, Telkom CEO.

“This Voice bundle becomes the lowest call bundle to any network in Kenya, ensuring Kenyans no longer have to rely on seasonal offers to get in touch with loved ones or run their businesses, most especially at a time when the Finance Act 2018 has made Voice, SMS and Data services more costly.”

How will the market react to these change in prices? Research shows when prices increase due to industry-wide excise duty, consumers switch brands to the cheaper one.

Brand loyalty is not a factor for price-sensitive consumers. When there is an industry-wide price increases, cheaper products will experience a rise in customer acquisitions. This is even reflected more in a product that consumers use on a daily basis.

A case study conducted in China titled: The effect of cigarette prices on brand-switching, found that when the prices rise due to tax or other factors, smokers switch to a cheaper brand to meet their needs.

The study, conducted by the University of California and the University of Waterloo, surveyed 3477 smokers from China between 2006 and 2009. Cigarette brands were sorted by price into four tiers, using excise tax categories to determine the cut-off for each tier.

Overall, 38 per cent of smokers switched price tiers from one segment to the next. A change in the price of cigarettes altered the tier choice of four per cent to seven per cent of smokers. This shows that consumers are rather flexible in brand choices and do not display strong loyalty to one brand variety.

The brand choice appeared to be sensitive to the price, controlling each consumer’s income and several other socio-demographic characteristics.

“The large spread of cigarette prices in China appears to alter the brand selection of some consumers, especially smokers of cheaper brands. The tobacco pricing and tax policy can influence consumers’ incentives to switch brands,” reported the researchers.

“ In particular, whereas in proportion to the estimated value of the goods or transaction concerned, taxes in a tiered pricing system like China's encourage trading down, specific excise taxes discourage the practice.”

- African Laughter