After setting up a solid calling card infrastructure and printing your calling cards, it is time to start making money. First, you need to set your selling rates, and then you need to market your product.
There are many factors to consider when setting your selling rates. You need to consider your competition’s prices, your expenses, and the buying rates per destination.
Analyzing your competitor’s pricing is not as straight forward as it may seem. Sure, they advertise 8 cents a minute to India, and 1 cent per minute within the USA, but how much are they really charging? The truth is that the profit for most companies is NOT made with the per-minute charge, but rather, with the various fees that they charge to their customers. Yes, there are many cards in the market that do not have fees, but these cards always charge a significantly higher rate per minute. Below are the different fees that CardSaver supports:
So let’s take the scenario where your competition is charging 8 cents a minute to India. Let us assume they have an activation fee of 39 cents, a connection fee of 39 cents, and a billing increment of 3 minutes. There is no disconnect fee or maintenance fee. Let us also assume that the customer’s call lasted for 25 minutes (which rounds to 27 minutes if you are using 3 minute increments). The total cost of the call is as follows:
(27 minutes * $0.08) + ($0.39 activation fee) + ($0.39 connection fee) = $2.94
The total charge per minute is actually 11.8 cents, NOT 8 cents. That’s a 50% difference! Even if your cost is 9 cents per minute, which is more than the advertised price, this call would be profitable. So, as you can see, the profit is in the fees, not the charge per minute.
In Economics, the practice of setting different rates for different customers is called price discrimination. Almost every company takes advantage of this economic practice whether you realize it or not. The idea is to charge more to customers that are willing to pay more, and charge less to customers that are not. Put yourself in the following situation:
You are a resident of the United States, and you are on a business trip in France. You have just landed at an airport in Paris. Now, you need to find a way to call home and let your family know that you have arrived safely. You also need to call the office in the US and confirm the time of your meeting tomorrow. Would you mind spending 30 cents per minute for this call? Probably not, especially if your company is paying the bill!
CardSaver allows you to brand different cards and set different rates for each card, thus allowing you to take advantage of price discrimination.
Generally, when calling card companies create a new brand of card, it is targeted toward a specific region of the world. For example, one of PEC’s customers created a card called “Hello Africa” which targeted consumers wanting to call Africa The rates for Africa were set so that it would yield a 10% profit. The rates for calling to USA and UK were set to 5 cents per minute, which is still a reasonable rate, yielding a profit margin of 400%. It turned out that this customer made more profit from the few customers that called USA and UK than from customers calling Africa. Although most people will call the destinations you are targeting, do not forget that people will need to call other destinations as well, and they are usually willing to pay a premium.
By simply setting your selling rates higher than your buying rates, it does not guarantee that you will make a profit. You need to consider all your recurring expenses into the equation, such as your lines costs, your Internet cost, your printing costs, your co-location fees, and any miscellaneous business expenses that you may have. The largest expense is usually the distribution expense. It is always best to exaggerate expenses to consider the worst-case scenario.