Is Verizon Abandoning Its Premium Price Strategy?

By Markets Fool.com

Whether the CEO likes to admit it or not, Verizon is feeling the pressure from Sprint and T-Mobile as they offer low-price alternatives to Big Red's premium service plans. The company has offered several price cuts and limited-time promotions over the past year to attract new customers and keep existing ones from leaving.

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The company's latest price cut/data bump includes a 10 GB-per-month More Everything plan with a base price of just $80 per month. Comparatively, AT&T offers a similar plan for a base price of $100 per month. In October, Verizon offered a promotion that lowered its prices for high-data plans to the same prices as AT&T.

Is Verizon starting to abandon its premium pricing strategy?

The pressure is on
Early last year, AT&T started making permanent price cuts to several of its low-end data plans. The company now offers Mobile Share data plans starting as low as $25 per month (1 GB per month) for the base price. (Subscribers also have to pay between $25 and $40 for each phone they add to the plan.)

Verizon, meanwhile, hasn't budged much on its pricing for low-data users. A gigabyte of data per month will still cost subscribers $40 per month plus the additional costs of adding lines. But when you move up to 10 GB, the price is rather affordable.

Take a look at a price comparison for four lines and 10 GBs of data.

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Carrier

Verizon

AT&T

T-Mobile

Sprint

Price

$140

$160

$100

$140*

*Includes 12 GB of data because Sprint doesn't offer 10 GB per month.

For a family of four, Verizon may now offer a better value than Sprint. If you consider that Verizon's coverage is superior to Sprint's, there's almost no premium charge for Verizon's network.

This table doesn't consider that Sprint is also offering Verizon (and AT&T) customers a chance to "cut your bill in half," which means it will offer almost the same exact plan for $70 per month that it charges current customers $140 for. Sprint is willing to cut its revenue in half to attract new customers, but it's doing nothing to keep its current customers. And they're fleeing in droves as Verizon and T-Mobile offer better coverage at the same price or lower. Last quarter, Sprint's postpaid customers churned out at a rate of 2.18%, and the company has lost a net total of 626,000 postpaid subscribers over the last year.

More striking, for Verizon, is that it's charging less than AT&T. While AT&T has worked hard to improve its network performance, it's still slightly behind Verizon's. Verizon should be able to price its service plans at least at the same level as AT&T, if not higher.

Gross margin is already going down
Over the past two quarters, Verizon's gross margin levels declined year over year. While Verizon's gross margin decline isn't as significant as T-Mobile's, which has aggressively priced plans, it's still an indicator that Verizon is losing its ability to price its services at a premium.

T Gross Profit Margin (TTM) Chart

T Gross Profit Margin (TTM) data by YCharts

With prices for some of its most popular plans falling to around the same level as AT&T's, Verizon's gross margin is moving toward the same sub-60% level AT&T operates in. If T-Mobile's and Sprint's price promotions continue to impact Verizon's and AT&T's prices, those gross margins could continue to trend lower as the two fight for smartphone users in an increasingly saturated market.

Analysts currently expect Verizon's earnings growth to outpace revenue growth. It will have to find savings in its operations to make up for declining gross margins. With the transition from 3G to 4G and continued build-out of its 4G network with the new wireless spectrum the company is buying at auction, cost cutting in operations might be hard to find.

Still, with 100 million-plus customers, cash flow is well intact.

The article Is Verizon Abandoning Its Premium Price Strategy? originally appeared on Fool.com.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.