BT line rental increases – Why do paper bills at BT cost so much?

The Telegraph reports that line rental for all British Telecom customers will increase by £1/month.

Communication Breakdown
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For somebody who receives paper bills, this is a rise from £11.50/month to £12.50/month for those on paper billing. For those on paperless billing (i.e. online), bills will increase from £10.25/month to £11.25/month. According to BT, customers can mitigate the price rise by switching to paperless billing at the same time. This is a fantastic demonstration of price discrimination.

On face value, having to pay an extra of £1.25/month for a paper bill seems ridiculous. It is obvious that this £3.75 per quarterly bill charge isn’t there to cover BT’s costs. There is no way that printing, processing and mailing a phone bill every quarter would cost more than 30p. That would leave BT with an additional £3.45 of pure profit per quarter for every paper bill customer.

I’ll explain using the old prices of £11.50 for paper billing and £10.25 for paperless billing.

The market rate for line rental is £11. BT’s rivals such as Virgin Media charge approx. £11. For BT to be price competitive, it must have a lower line rental than Virgin. If BT generally offered line rental at the paper bill rate of £11.50, it would be extremely uncompetitive against Virgin. However, at the paperless rate of £10.25, BT would be much cheaper than Virgin. But they’d probably make a lot less money as the profit on each line rental would be lower than it could be.

Companies get the best of both worlds by charging customers who don’t mind paying more (price inelastic customers), more. Customers which do shop around for line rental and do care how much they pay (price elastic) will pay less.

Red London Phone Boxes
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The costs of paper and paperless billing have absolutely nothing to do with the different line rental charges. It’s simply a way for BT to differentiate between how price elastic customers are. My grandmother can’t be bothered to shop around or to go to the effort of accessing electronic bills. She has paper bills and pays £11.50.

On the other hand, somebody like me will shop around to find the best deal. If BT charged me £11.50 as well, I would choose Virgin for a saving of 50p/month. But as BT’s paperless line rental is lower than Virgin’s line rental, I would choose to go with BT and paperless. For me, the cost saving would be worth the small extra effort to check an online bill.

By charging different prices to different customers depending on how much they are willing to pay, BT can increase their customer base without cutting their prices for everybody and their profits.

It is quite a clever way of operating price discrimination and has a double whammy in allowing BT to proclaim that it is encouraging people to be green. It’s something businesses do a lot and something well worth being aware of. See my previous post , “Why is popcorn at the cinema so expensive?”, for another example.

4 thoughts on “BT line rental increases – Why do paper bills at BT cost so much?

  1. Is it a bad thing? How is its morality manifest? (Hint: I can’t see anything wrong with people paying what they want within parameters set by the company.)

  2. Hi Tim,

    I don’t think its a bad thing at all! In fact, it is a very good thing in my opinion, certainly in this case. (Though you could make an argument about this essentially charging more to pensioners who are more likely than not to not have access to the net and that charging more to pensioners is a bad thing).

    The term price discrimination does have some negative connotations (like racial or gender discrimination) but I think many economists believe price discrimination is good.

  3. Out of interest, what’s to stop from Virgin from doing the exact same thing with their prices and entering into a price war? Surely eventually you’d end up with equal (ish) prices for both paperless and paperful billing?

  4. I have just received my (now Monthly rather than quarterly) BT bill.
    There is an extra charge this month … “Paper bill fee £1.50”
    Is this legal?!!!

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