Pricing Component for Vonage

As we approach the digital age, the need for technological advancement over the existing POTS line has never been greater. POTS (Plain old telephone line), though primitive, and expensive, still provides adequate phone service to its consumer's home, however it is losing ground dramatically to a newer technology called VoIP (Voice-over-IP). VoIP technology enables its customers to make telephone calls using a broadband internet connection instead of a regular POTS line. VoIP converts the voice signal into a digital signal that travels over the internet, and then when it reaches its destination it converts it back to a voice signal which can be used with any telephone.

Vonage is a company which offers phone service that implements VoIP technology. The biggest advantage that consumers who use Vonage will see, are the enormous cost saving it has over traditional POTS lines. Vonage comes with all the calling features found on a regular POTS line, but at a fraction of the cost. These features include 3 way calling, call forwarding, caller id, and a voicemail service. The calling plans are very affordable. For example, for $24.99, consumers will enjoy unlimited calls to anywhere in the U.S. and Canada. Also, unlike traditional POTS lines, where there are always hidden taxes totaling in excess of $15.00, Vonage's taxes in total equate to $3.15. The total monthly Vonage phone bill for customers who choose the $24.99 calling plan, will be $28.14, as opposed to the almost $56.00 plus tax the consumer would pay for an equivalent POTS line with the same features.

According to a report from research firm In-Stat/MDR, by 2007 the U.S. VoIP market is forecast to grow to more than five million subscribers, a five-fold increase over 2002 levels. This has prompted telecom giants such as Verizon, AT&T, AVAYA, and many more to enter the VoIP market. Each of these service providers offers competitive pricing calling plans with many features to attract consumers. The impact of these similar, yet competitive calling plans pricing, has creating a pricing war among the VoIP service providers. When one service provider lowers their calling price plan, their competition lowers their calling plans accordingly. For example, Britt (2004) found that "an announcement that AT&T would drop the price of its residential broadband phone service CallVantage from $34.99 to $29.99 per month was followed quickly by an announcement that Vonage would drop the price on their calling plan to $25 from the previous $29.99 (p1)".

The demand for VoIP service is relatively price elastic. A reduction in VoIP market price will lead to an increase in quantity demanded. The lower VoIP prices will affect the service provider's revenue, but it will increase penetration into the total voice market because more consumers would be more inclined to subscribe due to the price disparity for the same calling plans and features when compared to a POTS line.

Competition affects consumer demand and price. Consumer demand and price are directly related to one another. When the price of a good or service rises, the amount demanded falls, conversely when the price falls, the amount demanded rises. The competition between VoIP service providers has helped to keep prices low, and this has helped to increase the demand for VoIP service. Quality also affects consumer demand and price. If the quality of the VoIP service is poor, the demand for it will be poor, and the consumer will not want to pay the price. If the quality is good, the demand will be greater, and consumer will be more inclined to pay the price.

To further enhance VoIP service revenue possibilities, the service providers should keep prices low to attract new customers, but not so low that they cannot make a respectable profit. They should also ensure the highest quality service so that existing customers can tell perspective customers of the great quality of service.

One of the largest issues that affects the cost of Vonage's VoIP service is competition. As larger and more reputable telecom companies enter the VoIP market, it inevitably increases the competition for the same market share. As a response to this increase in competition many VoIP service providers, including Vonage, either lower their prices or add additional features with their service to offset the increase competition, and attract consumers. Mergers and acquisitions of competing VoIP service providers can affect the cost of VoIP service. Mergers and acquisitions reduce competition by reducing the number of VoIP service providers. Company mergers and acquisition can cause the price of the VoIP service provided to increase dramatically, especially if the merging firms have a disproportionately large market share. Consumer demand will also affect the cost of the VoIP service. If the price of VoIP service rises, the demand for the service falls, however if the price of the VoIP service falls, the demand for the service increases.

The impact of technology has had a tremendous affect on productivity and the average total cost of Vonage's VoIP service. There have been significant benefits from the applications and products produced by the convergence of voice and data technology using the Internet protocol (IP). The ubiquitous presence of the internet has made the implementation of VoIP technology seamless. With the exception of the phone adapter there is no other hardware required to install VoIP, which minimizes the total cost considerably. Since the VoIP signal piggy backs the already existing cable service coaxial line, there is no additional wiring that needs to be installed. The internet protocol (IP), dramatically increases VoIP productivity by allowing automated software upgrades through the internet. Consumers are not troubled by the cumbersome task of having to manually upgrade VoIP software.

Vonage competes in a perfect competition market structure. The VoIP market is composed of many firms relatively small in contrast to the overall market, selling identical services with similar additional features to capture consumer business. The VoIP market is uninterrupted by the Federal government. In the VoIP market structure, VoIP service providers are free to enter and exit the market. In the VoIP market each VoIP service provider has complete information about the prices charged by other VoIP service provider competitors.

The perfect market structure that Vonage operates in has had immense implications on pricing. This highly competitive market, with new VoIP service providers entering everyday, is in the middle of a price war. The VoIP war among service providers is forcing leading market competitors to cut prices and increase services to obtain greater market share and customers. Every time a VoIP service provider lowers his price