Telco operators typically seek to pack their networks with as many customers as possible, while other sectors, such as airlines and hotels, occasionally leave space open. These empty seats and rooms may present as lost opportunities, but in fact they are inevitable by-products of yield management: an approach to price optimization that telcos have been largely unable to pursue during the 3G and 4G eras.
The rise of 5G, however, has the potential to change that—paving the way for a significant shift in how telcos engage with customers. As the telco industry confronts a surge in network traffic volume, a massive proliferation of connected devices, and a future built around widespread automation and augmented reality (AR), carriers are facing a new opportunity to charge customers for what 5G promises and delivers.
Operators have already identified the enormous value that 5G core can bring in the B2B arena, and on this basis the 5G revolution is already under way. In the B2C market, however, the value proposition of 5G remains murky.
While 5G boasts dramatic improvements in specific areas—the technology can vastly improve the gaming experience, for example, by reducing lag time, and it can allow people to stream high-quality video from just about anywhere—there is currently no 5G use case compelling enough to transform the everyday consumer’s life. Potential “killer apps” may emerge, prompting large swaths of customers to pay extra for supercharged connectivity. But without knowing whether and when these apps will appear, telcos are struggling to put a price tag on 5G for consumers.
Despite this backdrop of uncertainty, there is a suite of promising innovations—including, but not limited to, yield management—that could allow telcos to monetize 5G in the B2C marketplace in the near term. Based on McKinsey’s experience working with telco operators across the globe, as well as on several recent surveys, including a survey of 2,400 customers in six countries that we conducted in April 2021, telcos have a clear path to monetize 5G in the B2C sector. Companies that want to stay ahead of the competition should consider investing in 5G core now.
Three innovative models—and one critical enabler—for monetizing 5G in B2C
There are three innovative models that telcos can pursue to monetize 5G in the B2C marketplace. Depending on the road that operators take, the technologies they invest in, and the partnerships they forge, we see a potential for operators to increase average revenue per user (ARPU) by between 16 and 20 percent—if not more.
For years, telcos have been unable to make incremental revenue from their services to a degree commensurate with recent capital-expenditure investments. Operators’ investments in 4G arguably paved the way for the entire app economy and the rise of software-as-a-service (SaaS) businesses, but meaningful monetization did not follow. This is partly because technological limitations have prevented operators from offering customers highly differentiated plans based on their divergent digital habits and needs.
5G core has the potential to change that. By enabling “network slicing,” it can allow telcos to shed the traditional one-size-fits-all model and differentiate among offerings that share physical infrastructure. This ability to charge customers more for parts, or slices, of a network that feature premium performance underpins all three of our innovation models.
Network slicing allows telcos to introduce sophisticated “speed tiering,” which is a critical enabler and prerequisite for the three innovation models. Speed tiering represents a fundamental shift away from the wireless industry’s standard gigabyte-based “data bucket.” While there is a perception throughout the industry that B2C customers will reject speed tiering on mobile devices, our research suggests otherwise.
Our survey shows that 74 percent of customers have a positive or neutral feeling about their operators offering different speeds to mobile users with different needs. Speed, we have found, correlates with higher customer satisfaction, even when a larger bill is attached. Elisa, a Finnish telco, reports that customer-satisfaction scores are around 50 percent higher for customers whose plans afford them speeds of greater than 300 Mbps, compared with those with plans offering less than 100 Mbps. Eventually, these customer-satisfaction rates should allow for higher average billing.
Still, there is a limit to how much customers will pay for increased bandwidth and speed alone. According to our survey, two-thirds of customers are unwilling to pay more than five euros per month for ten-times-higher speed. At the same time, 49 percent of customers expect consistently high speed, and 43 percent expect new applications and services.
By simply upselling traditional portfolios with 5G speed, we believe that telcos can increase ARPU by 3 to 6 percent. What’s more, by creating highly personalized and targeted offers, selling “experiences” as opposed to connectivity, and pursuing B2B2C partnerships, telcos have the potential to triple or even quadruple these gains (Exhibit 1).
Innovation #1: Impulse purchases and ‘business class’ plans
The first innovation model has telco carriers taking a page from the travel industry to engage in sophisticated yield-management strategies. 5G core allows telcos to move away from standard monthly subscriptions, which offer the same experience every month, toward flexible plans that allow customers to make impulse purchases to upgrade network performance when and where they so desire. With 5G, operators can also introduce “business class” plans, which feature premium network conditions at all times.
For example, if a customer needs stronger connectivity to stream a video, play an interactive game, or make an important phone call, they can simply press a button, pay $1 to $2, and receive a temporary performance boost. This pay-per-use 5G will be especially valuable to customers when networks are congested, allowing telcos to reasonably monetize the temporarily scarce resource of premium connectivity. A forerunner of this approach is the option to purchase Wi-Fi on an airplane; customers can decide in the moment whether the additional charge is worth it.
Companies are already seeing the benefits of this strategy. By creating differentiated tariff structures, multiple Hong Kong telcos, for example, have increased ARPU among the highest-paying customers by 20 to 30 percent—driving an expected revenue growth of 5 percent in the next three years.
The potential for telcos to make gains in this area is real. According to McKinsey analysis, 7 percent of consumers would be ready to use 5G boosters and would use them an average of seven times a month if the cost was $1 per boost. Among 18-to-24-year-olds, that figure rises to 14 percent. Overall, we see such impulse purchases increasing ARPU by 1 to 2 percent (around €0.20 to €0.40, or $0.60 to $1.20).
The second needs-based option would be to offer 5G business class plans, guaranteeing users unlimited premium network performance (in terms of speed, latency, stability, and network access). Our analysis suggests a potential ARPU increase of 2 to 4 percent from such plans, with 15 to 20 percent of customers willing to pay between 7.5 and 15.0 percent more for guaranteed network performance.
To seize the potential inherent in this model, telcos will need to have a sharper understanding of where customers are located and what they need at any given moment. This heightened level of targeting will require telcos to revamp their operational and business support systems so that they are able to engage with customers 24/7. It also will be important for telcos to differentiate 5G offers in a way that makes sense to customers. Lastly, regulation could become a complicating factor, as regulators may consider limiting the ability of telcos to establish measures such as speed caps.
