Tariffs are the prices charged to consumers by telecommunications service providers. Tariff systems vary from country to country and company to company, but in general they are based on several simple principles [1].

Why are tariffs charged?

Tariffs must, as a minimum, cover the cost of providing the service to the consumer, whether the consumer is the final customer or an intermediary such as a service provider. If a telecommunications service provider cannot recover its costs, then it will make a loss and the company will go bankrupt [1]. Tariffs should also be used to cover maintenance, additional research and other indirect costs associated with providing a service [1]. However, telecommunications service providers must be careful in determining their tariff policies as prices have a direct influence on demand for that service (see Supply and demand) [2]. Such an operator must constantly balance the need to provide cheaper rates, especially if there is strong competition, with the cost of maintaining the service at an optimum quality that is acceptable to the customer [3]. If operators charge too much, they risk alienating their customers, resulting in a loss of traffic and therefore revenue; if they charge too little, they will have insufficient capital to maintain the network’s QoS, which over time will result in similar customer disillusionment, albeit for a different reason.

Components of tariffs

Tariffs are generally made up of two components [1]:

• Standing Charges – These are fixed charges that are used to pay for the cost of the connection to the nearest exchange and the equipment to monitor that customer’s phone line or service connection. They are usually paid on a monthly basis, and called rental.
• Call Charges – These charges are usually variable and are used to pay for the cost of the equipment to route a call from the caller’s exchange to the recipient’s exchange. The charges can also be calculated on a fixed per call basis, variable basis depending on the time or distance of the call, or a combination of the two. Call charges can even vary at different times of the day.

It should be noted that these components form a basic tariff system and there are much more complex versions in existence too. For example, there is generally a connection fee to connect a new user to the network. Also, in some countries, the call charges are fixed at a monthly rate and included in the standing charges. Emergency, information and other types of calls can be automatically charged to the recipient insread of the caller, and there is always the option of call collect [1].

Tariffs also depend on the bandwidth provided. For example, dial-up modem connections are charged at normal telephone costs, but connections such as DSL are usually charged using a completely different accounting system [1] due to their “always on” nature.

Impact of tariffs on traffic

It is true that the more an operator charges, the less customers will use the service, particularily in the cost-sensitive or elastic residential market. The less the operator charges, the more customers will use their services [3].

It has been noted in studies of Internet traffic that the traffic intensity is directly affected by the tariffs charged in connecting customers to their Internet Service Provider (ISP). For example, a circuit-switched network provider, charges different tariffs at different times of the day. It was noted that at the time that the rates decreased, the traffic intensity logged by the ISP increased dramatically and then decayed over time at an exponential rate. The conclusion of the research was that by varying prices over time, a telecommunications service provider can reduce the level of the traffic intensity at peak periods, resulting in lower equipment costs because of the reduced need to provision to meet peak demand, which in turn leads to increases in long-term revenue and profitability [2].

References

[1] Farr, R.E., Telecommunications Traffic, Tariffs and Costs – An Introduction For Managers, Peter Peregrinus Ltd, 1988.

[2] Vannucci, D.E., Kennedy, I.G., Barker, M., Impact of Tariff on dial-up internet traffic: Modelling the subscriber response as a dynamic system, ITC18 Workshop for Developing Countries, Berlin, 2003.

[3] Kennedy I.G., Why is Network Planning Important?, Lecture Notes, ELEN5007 – Teletraffic Engineering, School of Electrical and Information Engineering, University of the Witwatersrand, 2005