Essay: Competition and Innovation: A Comparative Study of Telecommunications and Insurance (WIP)

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  • Competition and Innovation: A Comparative Study of Telecommunications and Insurance (WIP)
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Introduction
The project is based on the telecommunications industry as an example of how a price war over many years quietly suffocated market. The starting point lies first in the \”explanation\” of the telecommunications industry\’s history, which is based in both the markets development and government regulatory areas of the market. The telecom industry is thoroughly analyzed by several universities, and here\’s price war in the Danish telecom industry as a central theme. We choose the project to see the telecoms industry market development as an \”example\” of when liberalization goes \”worst\” in relation to the economic side. Above, we see that it is a clear starting point in the company, their history, external factors that have affected the market economy, in addition to this we want also to base on the consumer. Consumer expected pattern of thinking, their values when choosing products, and in addition, their approach to the industry.
Furthermore, compared to the telecoms industry outreach method seen that clear parallels to the insurance industry. What more can be seen in relationship to the insurance industry is the clear focus on price.
To get a better picture of the project the project shall therefore be viewed with the two sectors as the main focus, here we are talking about the telecom sector and the insurance industry, which branches off in three, the first is the comparison between the two industries, the second is on the basis of \” theory \”about how the company is part, and the third about the consumer and their\” segmentation \”
Above the comparison we also would like to reflect upon the possible directions the insurance sector could go and reflect upon some of the innovative trends that this sector will develop and how those trends will influence the current tendencies. There are many comparable tendencies in both sector, from which we will primarily focus on development of the market and channels, and we will reflect on the commodity factor and the quality aspect of the products, customer and firm behaviour from a social science point of view. We would like also contemplate on the competitiveness in both sectors on the firm level and a customer behavior level as well, trying to see the same problem from two different angle. The main aim of our study is to provide possible directions and suggest future tendencies for the insurance sector based on our contemplations regarding the challenges the telecom sector has been facing in the past decade.
Telecommunications
The section below is with focus on the Danish telecom industry history. The manly focus is on the 4 major players on the telecom industry history and a short introduction to the Danish government\’s goal with the telecom industry.
History
In 1882 the first Danish telecom central opened with only 22 costumes with the united idea about being connected. In the beginning there were four telecom companies, all with the monopoly on their territory in Denmark and was driven by the state. In 1990 the Danish government decided to unite the four Danish telecom companies in one, Tele Danmark sooner TDC. Tele Danmark had a mission that they should take up the fight with the international companies. Tele Danmark was listed on the stock exchange just a fever years after and they expanded internationally and the telecom companies in the world expanded to Denmark [https://tdcgroup.com/da/m%C3%B8d-tdc-group/historie]. In 1995-1996 the Danish telecom industry was liberalized. With the liberalization, the open market came and Tele Danmark was forced to open their net and a price development accrued.
TDC Today is the largest telecompany in Denmark with 8705 employees which is a 64,3% share of the total employees of the market. [TDC Annual Report 2015] On the total revenue TDC´s market share is in 2015 on 61,1%[Økonomiske nøgletal for telebranchen 2015] With copper access network which cover almost all population in Denmark.
Already in 1991 Sonofon got GSM license on same terms as Tele Danmark. Sonofon was on the Danish market one year after, 1992 and was the first challenge to Tele Danmark.[TDC Annual report 2015 & Økonomiske nøgletal 2015 ] In 2001 Sonofon accomplice to have 1 million customers. Because of a contract with the Danish government to be provider for mobile and fixed line in State institutions Sonofons share of the market was almost 40% in 2001.[Falch, M., Henten, A., Skouby, K. E., & Tadayoni, R. (2008) ] In 2009 Sonofon became under the Telenor Brand and has been ever since. Telenor is today (2015) the second largest telecom firm in Denmark.[https://www.telenor.com/wp-content/uploads/2015/09/Godkjent-aarsrapport-2015_93823723ahgahghgf.pdf]
In 1995 Telia started in Denmark and open to landline in 1996 and in 1997 they opened for internet and in 1998 they opened for telephone [https://www.telia.dk/globalassets/om-telia/billeder/skema.jpg]
After 1998 the tele price had been fallen a lot and the liberalization can take a big part of this.[http://orbit.dtu.dk/files/3038864/Working%20Paper%20119.pdf]
In 2003 the telecom company 3 went on the market, the market there was already competitive since 1998, and 3 with the 3G-network did succeed in their own eyes with their goal at being innovative and pioneers. 3 was also the first company with video calls in 2003 and in 2006 they launch 3G turbo network. They were also the first company in Denmark to have free telephone conversation in 2013[https://www.3.dk/om3/om-virksomheden/historie/]. Today 3 has over 1,1 million consumers in Denmark, and proximal 650 employers.[https://www.3.dk/om3/] On the total revenue 3´s market share in 2016 is on 7,3 % of the market share in 2015.[Hi3G Annual report 2015 & Økonomiske nøgletal for telebranchen 2015]
The history of the 4 major tele companies above speaks all a competitive industry, and the CEO´s from the top 4 tele companies continuously pronunciations that the tele industry is a very hard industry and the competition of the consumers I very hard.[http://www.business.dk/digital/teletopchef-mobilkrig-har-kostet-fem-milliarder-paa-fem-aar] The next chapter below elaborate a bit more on the Danish government\’s main goal for the tele network in Denmark and the wanted competition.
In 1995 the Danish government made a main goal for the telecommunication policy that Denmark before 2000 should have the world’s best and cheapest telecommunications service. Besides this, the Danish government also said that all consumers continually shall have access to ordinary telecommunication on the conditions; that there is not worse than today, but on the contrary become cheaper and better. [http://www.statensnet.dk/pligtarkiv/fremvis.pl?vaerkid=919&reprid=0&filid=7&iarkiv=1#2.1
& http://www.statensnet.dk/pligtarkiv/fremvis.pl?vaerkid=919&reprid=0&iarkiv=1]
The main goal from 1995 was the first one of the kind and in 1999 an agreement of principle about the goal for telecommunications policy was made and was supplemented with:
“Ensure the cheapest, most varied, best and broadest possible range of communications option to the maximum possible users.”
Many supplements have been made to the Danish telecommunications policy since 1999 but the main goal still stands.[https://ens.dk/ansvarsomraader/telepolitik/politiske-aftaler]
The hard competition with the cheapest options on the telemarket, has been called “price war” in the Danish media, and in 10 years the cheapest telephone subscription has fallen with more than 70%. The competition is till going and over 1 million consumers out of 8,4 million consumers are changing every year. In the tele industry it is not abnormal that a company are losing 20-30 % of their consumers in 1 year.
When looking at the goal with the broadest possible range of communication, in 10 years the numbers of mobile antenna has doubled and the whole telecom industries investment in new antenna, new teleconnection and innovative technologies is more than 6 billion kr.
Market Overview
The Danish telecommunications market, here from referred to as telco, were at some point a very profitable business, and when assessing the financial reports of the major competitors, is still quite lucrative (virk.dk eller energstyrelsen). However, since the privatizing of the market in 95’ the industry has experienced a steady increase in competition. This increased tension in competition, has in turn led to massive revenue drops to the sector (Falch et al., 2008: 43-44).
This tendency is illustrated quite clearly when researching the financial performance of TDC, the original Danish telecommunications company and only company that experienced true monopoly in the market before the liberalization (source for that), and compare it to the general performance of the market. This data shows that TDC in 2000 had a yearly revenue of 46 billion DKK (TDC årsrapport), where the total revenue of the entire market only is 38 billion DKK in 2015 (telestatistik andet halvår 15, energistyrelsen), (today tdc only have a revenue of 24 billions DDK in 2015 (TDC årsrapport 2015) So in turn, one company had a revenue larger than the total combined revenue of the market today (and TDC has experienced a drop in revenue of 52,2% in 15 years) – (TDC årsrapport 2010 – 2015).
This market tendency, is from the consumer perspective, very beneficial (due to lowering prices). However, said tendency is also very destructive from the companies view, and could lead to major companies going out of business, which in turn equals lost tax money, thereby society, and numerous jobs.
As of 2015 the Danish Telco sector consists of 13.3 million subscriptions over three product categories (mobile, landline, Fixed internet & tv services). Across the entire market it employs 13.535 people between 137 companies and has a total annual revenue of 39,304 Bill. DKK (energistyrelsen).
Thus the market has appreciable size and mentionable contributions to the Danish economy. However, as mentioned above the market have experienced a steady revenue drop, especially mobile services and landline, as seen in table fig. 1.
Fig. 1 shows data of the entire telco market from 2009 to 2014. To give a representative image of the market fluctuations, the data is divided into four categories, instead of the usual three. The reason being the drastic revenue increase of TV services (listed as other income in the table), usually included under data communication and internet. Had this aspect been not taken into consideration, the table would show a general increase in the market, as well as internet and broadband, when the actual increase is due to TV services increased profitability (fig 1.).
Due to the increased focus on TV services, and the high investment rate, varying from 17-21% the three years’ prior, the revenue increased quite heavily, thereby, growing the entire market\’s total value, for the first time since 2006 (spørg nicklas hvornår væksten stopped) (erhvervsstyrelsen).
As mentioned in an earlier segment (mention segment/ paragraph) the Danish Telco market got privatized in 1996. Already from the initial privatization the market had new competitive entries, such as Sonofon (insert source from Telenor webpage). The competitiveness of the market continued to increase, with major foreign companies, successful in their domestic ventures, entering the market – such as TeliaSonera (Sweden/ Finland), Orange (France) Hi3G (Hong Kong) etc. (source). This current influx of companies and competition, should result in a decrease in innovative initiatives over time, since more competition lessens the rents of monopoly, that usually favours successful innovation (Aghion et al. 2002: 2). However, this is not the case in the Danish Telco market. Despite having almost saturated the market with several major companies in neck and neck competition, the market kept receiving more entries and is, as mentioned earlier, now at 137 active firms (erhvervsstyrelsen).
The notable competitive pressure has in some ways benefitted the market (Vestager, 2015), advancing the technology, thereby leading to one of Europe\’s highest broadband and mobile penetration rates (Lancaster 2015).
However, the increasing consumer demand for services, due to high competition, has also resulted in decreasing revenue and increased cost, such as the case with the purchasing additional spectrum in order to accommodate the demand for data related services (Lancaster, 2015).
Low Price Competition
The sector below focus is on the telecommunications in Denmark low price companies, their market influence and a bit about the market development.
To fully stress the understand of price war and the seriousness of the side effect on this, despite the numbers that is speaking for themselves. The industry has lost a relative amount of revenue and the whole industry is now the same size as TDCs revenue in 2000 (TDC Annual year report 2000) (økonomiske nøgletal). The subscriptions is on the highest since the beginning of the telecom industry, and is on 8.4 million and yet the prices have been going down. (Telestatistik erhvervsstyrelsen) (DK´s statistikbank).
The CFO of Telenor, Henrik (Borsen.dk, juli 2008) on the price war, lets the word speak for themself :
“The price war is running at its absolute max, and at the moment, there is nothing indicating a truce anytime soon… I don’t believe that the situation will become any better, before some sort of consolidation happens in the Danish [Telecommunications] market.” Henrik Skov, CFO, Telenor (mobilsiden, 2012).
The low price companies in the telecom industry was aware that they could only win the consumers by offering low prices, and that is why the all “big” firms made subsidiary companies, with also are low price, to “steel” the consumers from other companies. It could be seeing as a war of number of consumers at any cost. (Konkurrence i den danske telebranche, 2014)
Late innovation and maintaining profitability
The law of price and demand states that, if the supply of a product increases for the same demand, i.e. the market doesn’t grow in number of users, the price will experience a downfall (source). This downfall is clearly shown in the example above, where TDC’s profit in 2006 added up to the same amount as the entire market today (source). If we follow the law of supply and demand, the telco industry will just keep on deteriorating with the constant influx of competitive entries. However, there is several factors not being taking in to consideration in this very simplistic way of explaining market dynamics, such as human necessity, substitute products, but most importantly it doesn’t consider product differentiation (Pinkasovitch, 2014). Several economic theorists have through decades argued in favor of the use of product innovation in order to gain competitive momentum and escape competition, e.g., (Aghion & Griffith, 2008) (Aghion et al. 2014) (Aghion et al., 2002), especially in neck-and-neck markets such as the Telco industry (Aghion et al., 2014: 1).
Other than gaining competitive advantages, innovation can also lead to increased efficiency, for instance through organizational innovation, which in turn would help maintaining profitability (Pisano, 2015) – a paramount factor in red ocean markets with high costs such as in telco (Chatx, 2015).
Although the factors mentioned above have laid the basis of many economic studies, with innovation leading to positive outcomes in the clear majority. Its importance has not been adopted in the telco industry. Over the course of many years the combined investment varied very little, showing an unwillingness from the industry to increase their focus on innovation (source Nicklas). Therefore, when removing product differentiation and innovation, the products becomes commodified , leading to the price being the main competitive parameter – in turn resulting in a price war (Levitt, 2008: 32).
Initially the dropping of price can be viewed as an easy and reversible action (Rao et al. 2000), with the short-term goal of increasing revenue and in the long run gain market shares and outcompete the rivals (Investopedia, 2015). However, as each company tries to out-perform each other, and gain the biggest share of the market and the following revenue increase, it will in the end result in a reduced profit and growth for the entire industry (B2B International, 2016). This tendency can escalate very quickly, especially in markets with little trust (Rao et al. 2000) and high entry rates. Furthering the problem in a price war, especially in low trust markets, is new products or initiatives being copied by the entire industry, continuing the commodification, and driving the cut-throat competition, and as a result leaving even less for growth related investments (B2B International, 2016).
Results
The results of the excessive supply over demand and seemingly unwillingness to invest in innovation, for the Danish Telco industry has been, as seen in the market overview section of the case, a considerable revenue drop (see earlier source). This comes as a result of severe commodification and the following price war between large competitors (source). Instead of accepting the apparent price war within the telco sector, the companies should have aspired to accommodate the war, where several measures could have been made (Rao et al. 2000). Here the lack of product innovation and cross company innovation (define the different sorts of innovation in the previous segment), is also a potential downfall, since this is argued as being a main tool to maintain profitability and fight the price war;
“Introduce new products: Introduce flanking brands that compete in customer segments that are being affected by competitors” (Rao et al. 2000)
However, within the last few years the Telco industry has become aware of the situation, and is starting to invest more intensely (as mentioned in the market overview section) in consumer directed product innovation, such as LTE, in which the Danish sector has one of the highest penetration rates in the world (source), expanded TV product range and possibilities and VoLTE (voice over LTE network) (Source). Furthermore, strategic cross company partnerships, as well as attempted joint ventures, have been established in order to raise ARPU, with the intention of furthering investments (average revenue per user) (source). Although measures are being made from all the major competitors in order to regain a healthy state of the market, even raising the prices, the market is still struggling (source) – thereby, indicating that the innovation and willingness to adapt the fierce competition and following price war, has already taken its toll and shifted the consumers.
Insurance
History
The insurance industry in Denmark is relatively competitive and has one of the highest densities of companies on the market. The life insurance has the biggest portion in the insurance sector, which is 66.3%. The non-life insurance holds 33.7% of the market. For the year 2008 the total number of licensed (life and nonlife) insurance companies was 174. However, since then their numbers have substantially declined so that in 2013 the number was 115 (76 nonlife insurers and 39 life insurers). The reason for the declining number is the consolidation of the companies. Two of the reasons for the consolidation are the financial crisis and the low interest rate environment.
In the past few years the sector has seen fluctuations, regarding its growth, however, the overall growth between the years 2011 and 2015 has remained positive (3.7%).
Still the size of the insurance sector is relatively big compared to other countries in EU. The reason for this is because the life insurance related to work comes in a package with the pension savings. For the year 2012 the insurance sector assets to GDP were 129%, whereas the average for the EU-27 countries was 68% .
The life insurance sector is mainly consisting of retirement savings plans and mortality protection. Since the market is dependent on non-economic and economic factors it is very difficult to make future predictions on how the sector is going to perform in the future. However, for the past few years, as we already said, it had a positive and consistent growth, and this trend is forecasted to continue until the end of the forecast period which is 2019. For the year 2014 the largest segment of the life insurance the pension/annuity segment accounted for 86.1% of the market\’s total value which was 19.5$ billion. Whereas the mortality protection (life insurance) made only 13.9% of the market’s value which is 3.1$ billion. This is how the life insurance sector has been performing for the past few years. However, in this project we are going to concentrate on the non-life insurance sector. Any of the currency conversions used in the empirical data, for both life and non-life insurance sector, have been calculated using the 2013 annual exchange rates.
Revenue for non-life insurance
The non-life insurance market sector is consisting of the general insurance market, segmented into auto/motor, property, accountability, and other insurance. The other segment is made up of life insurance products which includes health, travel, and accident coverage among others.
The value of the non-life insurance markets is shown in terms of the gross premium incomes. The gross premium income is defined as an insurer’s premium income for the year from the policies calculated without any reduction for reinsurance premiums paid or payable by the insurance company. Over the course of 8 periods the market grew from $8,240.50 to $11,689.70, its compound annual growth rate, or its overall return, is 4.47%. CAGR essentially smoothers out the progress of the market over a period of time, providing a clearer picture of the annual growth. However, although the market value started at $8,240.50 and ended with $11,689.70, its growth in any one year may have been quite a bit higher or even negative (if the market had lost money over that time). Consequently, the CAGR figure may give the impression that the market has produced a stable return throughout its life, even if the investment was extremely volatile, fluctuating a great deal from year to year.
The Danish non-life insurance market has grown moderately between 2010 and 2014. Growth rates are expected to improve within the forecast period. The Danish non-life insurance market generated total gross written premiums of $11.7 billion in 2014, representing an annual compound annual growth rate (CAGR) of 4.47% between 2006 and 2014.
The property segment is expected to be the most lucrative item on the market in 2014, with total gross written premiums of expected $4.1 billion, equals to 34.6% of the market’s overall value. The motor/auto segment will contribute to gross written premiums of $3 billion in 2014, equivalent 25.9% of the market’s aggregate value. The performance of the market is forecasted to accelerate, with an anticipated 3.7% for the five-year period 2014-2019. Which will then drive the market to a value of $14 billion by the end of 2019.
This table shows the fluctuations in market shares over 8 years, however due to the statistics parsing between the top 3 companies with largest market shares, and top 4 you can tell that an insurance like Codan (Later being bought by RSA), is missing from the statistics during 2009-2010. As shown on the table regarding non-life insurance market shares, it becomes evident that large fluctuations exist in the market. Fluctuations such as Tryg’s 30-40% market share increase in 2011, and then dip again in 2012. Michael Hübbe the new CEO as of late 2010 in Tryg started changing the organisation structure of Tryg, mainly Michael decided to divide the different sectors of the business and focus each sector on profitability individually, so that intensively the whole business could focus on profitability. Which evidently worked for Tryg.
It is important to mention that although the insurance sector also lost large sums of money during the crisis, it was more of a heavy blow to the market’s growth, rather than the value of the insurance market. The top competing companies, share almost the same market shares, from which we might surmise that the competition level is high, this however does not need to be the case, nor does it that “one way for a company to increase its return is by increasing its market share, and studies appear to have confirmed this relationship.” ((Bloom and Kotler 2014 08.01) which we will discuss in the relationship between insurance and telecom)).
Size
On a broad scale, for the year of 2015, Denmark accounted for 2.2% (36.3$ billion) of the insurance market in the European Union. Non-life insurance market is 1.7%.
Comparable Tendencies
The following segment has its focus on the ways how the two industries are comparable.
The reasons we chose to compare the telecommunication and insurance sector, were due to similar characteristics regarding; product necessity, consumer behaviour, threat of competitive entries, number of large competitors, threat of substitute products and low supplier power.
In terms of product necessity both products are considered a necessity by consumers. This is clearly shown in table (X), showing that for each Danish citizen we have about 1,5 sim cards with including subscriptions (Energistyrelsen, 2015). Furthermore, insurance is in several instances obliged by law, such as fire insurance for mortgaged property, Casco insurance for mortgaged vehicles, liability insurance for all vehicles etc., all of which are non-life insurances (IF Skadeforsikring, 2015).
Consumer behaviour:
The consumer loyalty is significantly low. Therefore, in the non-life insurance sector consumers are usually willing to choose the cheapest deal. This goes the same for the telecom sector. Since there aren’t any fees or constrictions to prevent the consumers to switch from one company to another. With the increased use of the Internet people have the possibility to contrast and compare. This is one of the reasons why the tendency to switch in both sectors is rather high.
Since there aren’t any substitutes for insurance and some policies are usually legal requirement, some consumers might start practicing ‘self-insurance’. This means that the consumer has a certain amount of money, which is set aside in order to compensate for a loss that might occur in the future. However, self-insurance is not always suitable for everyone, for example, in order to obtain a mortgage, having an insurance is mandatory.
As for the telecom sector, there aren’t any substitutes for mobile service.
Buyer power, for the insurance sector on overall, is assessed as moderate. The reason it is moderate is because legal frameworks constrain the consumer. The telecom sector has a significantly high buyer power.
The consumers in both markets seem to have quite a lot of leverage.
Low supplier power: Losing leverage to the consumer – 1,4 million?(Nicklas) change their company every year – wanting to change because of price. Power as in leverage, not physical supply (oranges example).
Both industries show very price sensitive tendencies. Illustrated through both sectors easy and costless transferring procedures i.e, switching cost, as well as a low unique value effect and high transparency. The cost of switching in both insurance and telco is free of charge, and can be done online or through direct contact with the provider. Online platformication has further increased the price sensitivity, since they have full view of the entire market and price ranges of both industries.
Within every year 1,4 million Danish customers change telco provider, displaying the willingness to change, primarily due to price – whereas in the insurance industry 68% of the market uses price as the main catalyst for choosing insurance provider.
Both markets experience equally high threat of entries and general competitive pressure, with low price companies accessing the market with the intention of causing market disturbance. Examples of this could be telco companies such as Callme, where Henrik Larsen, part of the executive management is quoted saying;
“Every Monday morning, we would clock in, check our competitors’ prices, and discuss how we should act accordingly? If Oister dropped in price, should we also go down in price, or add more to our packages…?” (Christiansen et al., 2014)
Likewise, companies such as GNFF in the insurance sector, also entered with a business model focused on competitive disturbance. Its short-term goal was acquiring 40% market share with an extremely price driven business plan (Nyholm & Sixhøj, 2013). This is in combination with a market already fairly saturated with 3 to 4 very large competitors, differing from 10% to 40% in total market share within their respective industries, equals a very high competitive pressure (source).
Problem formulation
Write the research question!
“Can the insurance sector experience the same destructive price sensitivity as seen in telco, and could increased competitive disturbance catalyze this tendency?
Furthermore, how would the competitive pressure in the insurance sector affect innovation? “
Methodology
In the following section, we outline how the problem formulation is handled and work with the intention of answering it. In the project, there lies a basic idea, which is to compare the two sectors. The basic idea is built upon the new threats in the insurance sector that may interrupt the market as seen in the telecom sector, where this disturbance has started a price war. The wish is to analyze the sectors and look at if the indicators can indicate the same indicators seen in telecom.
In our initial section we used the descriptive research method. We used much qualitative data from various empirical data sources and tried our best to validate and be critical of the origins of sources.
We limited our use of statistical resource to data from verified sources, and were able to be more flexible in the upcoming analysis part.
Our analysis is divided into a qualitative and quantitative data part.
Both parts include the use of our Habermas theory, which is introduced in the next part, our theory section.
Part I introduces the value that people attribute to these two services, and puts them in the context of price elasticity, price sensitivity and competitive disturbances, followed by a semi-conclusion by the theories of Habermas, to fit and make the 2nd part more cohesive with the 1st part.
Part II revolves around the use of the theory of the inverted U. It uses what we have already made hypothetical conclusions to in the 1st part, and visualizes the link between competition and innovation.
Critically assessive of the material we used in an analytical fashion.
In the following section, there is outline on how the problem formulation is handled and work with the intension of answering it. In the project, there lies a basic idea that is to compare the two sectors. The basic idea is build upon the new threats in the insurance sector that maybe can interrupt the, market as seen in the telecom where this disturbance has started a price war. The wish is to analyses the sectors and look is the indicators can indicate the same indicators seen in telecom. There will accure a ranges of methods.
Theory
Introduction to the theories
Habermas
The inverted-U
How we apply them, and to what gain?
Why those, and why 2 not 1? (WIP)
In what areas of the analysis are these theories relevant?
How are they different, and how do they complement each other?
Criticism of the theories
Analysis
Product value and price war
Value of things (WIF)
In both insurance and Telecom, we are dealing with homogenous products. A service, which is only differentiated, by the level of service. The theories of value are divided into the intrinsic theory of value and the subjective theory of value.
The intrinsic theory of value is the theory of objective value, which advocates that the values of the goods or services are an objective judgment. You find the intrinsic value by taking into account the production process of the item and costs required and related to the production of the product.
In the subjective theory of value, an object will only have value when it can satisfy human wants and is limited in supply. The marginalist theory of value is based on this, which advocates that the price of an object is based on the needs and wants of human beings and not of the intrinsic value of the object. Therefore, that means the object is considered to have value only when it is useful to members of society. Its value depends on the ability to the wants of an individual. The perceived value from insurance payments comes from the buyer placing a subjective value on the dollar amount of the insurance benefits. This subjective value of payment is associated with the decision maker’s attitude towards financially supporting his/her property. The subjective value varies with the size of the household, wealth and income.
The value of spectrum products, is determined by the service and partly the physical part of the product i.e. antennas and wiring. This is something telecommunications and insurance share, a market in which the product is infinite and homogenous. This creates a difficulties in creating value in order to differentiate their service offerings, and in order to attract and keep customers. It can be argued whether insurance is a homogenous product, on the basis that the product is infinite and only has one variable that can be tweaked. This variable is the level of service, as discussed earlier which creates the distinction, however say the insurance companies were to scrap service workers, and move towards a platformification of insurance. It would allow them to save money on salaries, and instead lower their prices on the basis of becoming more competitive. Another basis to argue that insurance is a homogenous product, is that it cannot be distinguished from competing products from different suppliers. We can argue whether or not the insurance sector of Denmark is transparent. Broadly construed, transparency revolves around making relevant information freely available to consumers and others who act on the behalf of them. In the interest of the companies, transparency should be kept to a minimum in order to uphold the pricing of insurance services.
The value we add to telecommunications and insurance
The competition and consumer authority committee of Denmark wants to make it easier for consumers to switch their telecommunications and insurance companies. This is done in the belief that competition is inherently good, as it will force interchangeability in the two sectors, and force the providers to offer a better product in order to reduce the loss of customers. This committee performed a study, examining the various reasons for consumers switching service providers, how it affects competition and consumer conditions. Throughout the study the mobile market, represent a market with high mobility, while the insurance represents a market with lower mobility.
Consumers switch mobile and insurance providers in order to save money, annually every third switch their telecommunications provider and nearly a 1/10th switch their insurance company. The wish for a cheaper telecom/insurance solution is the reason to change provider, as of the study conducted by the committee which showed that 44% of Telekom customers, and 68% of insurance customers were willing to switch due to price.
Price advertising in most cases inspire people to switch mobile subscriptions; in the mobile market, the effect of advertising is grandiose, especially customers look for a plan to fits them specifically. In contrast, insurance company advertising much more image-based rather than price advertising, as we might expect from the insurance sector. Consumers are lead to change insurance company due to new life-situation, new car or buying of a house, and a major issue in insurance, is the consumers low involvement in the forming of the insurance. A mobile phone is an integrated part of the consumer’s everyday life, whereas insurance does not go into interest or account of your everyday life. Leading insurance companies also believe the low involvement, to be part of reason to the low mobility in the insurance sector.
Lack of transparency, is probably also one of the main challenges to change provider in other markets. Ex. A consumer compares two insurance companies, but is unable to find the significant characteristics and different in product. Therefore, it is expected that the consumer will find issues in interchangeability.
Price Sensitivity
When shortly glancing over the two industries and their economic transformation, e.g., the telco revenue drop (source) combined with a seemingly highly price focused consumer behavior in insurance, where upwards of 68% choose insurance due to price (source). It is likely to assume that both industries experience high levels of price sensitivity. Making it suitable to measure, because of its importance towards describing the price focused consumer behavior.
In the following segment we will cover how price sensitive the two industries actually are, and how price sensitivity can be measured. Furthermore, to what extend these measures follows the tendencies seen in the different sectors. Price sensitivity will help uncover to what extend the price of product, affects price focused consumers’ behavior, and how insurance can accommodate said behavior.
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