Calling all customers: it's a price war

The opening shots have been fired in what could be a summer price war among home phone providers. Millions of households stand to benefit from bumper savings on their phone bills, with BT and Carphone Warehouse's Talk Talk being the first to trade blows.

On 1 June, BT announced its second major price cut of the year, reducing its Option 2 home phone package from £3.95 a month to £3.45. At the same time, its Option 3 package fell from £9.95 a month to £7.95.

Both packages offer free calls to other landlines during the evenings and at weekends. As part of its move, BT also launched a deal for Option 1 customers, and households with landlines supplied by rival providers, offering an Option 2 with one year free of monthly charges.

And, in an environmentally friendly move, line rental falls by a further 25p a month for customers who opt not to receive a paper bill. The cuts mean BT has reduced its prices by up to 45 per cent since last summer, when Ofcom, the regulator, relaxed price controls. However, no sooner had BT announced its price changes than TalkTalk hit back with a range of cuts of its own, and a promise to give £1,000 to any customer who could prove that they were paying less with BT.

TalkTalk is to cut line rental by 50 per cent to £10.50 – the same as BT – and paper copies of bills will be free. The price of some of its all-in packages will also be cut. For example the Talk 2 plan, which covers all evening and weekend calls to local and national landlines, has fallen from £3.89 to £3.39 (excluding line rental) compared with BT's new rate of £3.45, bringing it in at just 6p cheaper than BT.

Talk Talk said its line rental charges would fall across the board and that it would offer free international calls to 30 countries. But BT's cuts come at a price for the 11.4 million "pay as you go" (PAYG) customers on Option 1, the company's most popular tariff, which is based on charges for individual calls rather than an all-in price.

From 1 August, they will see the cost of daytime calls rise from 3p per minute to 3.25p per minute. And, the "connection fee" which is levied on each call from a BT landline in addition to the per-minute rate will double from 3p to 6p.

BT is also scrapping its cut-price 5p weekend mobile phone call rate, arguing that its charge for mobile phones during the week is being cut to compensate - from 13p to 12.5p in the daytime and from 8p to 7.5p in the evening.

The restructuring of the BT tariff is being seen as a concerted effort to get people to switch from PAYG charges to an all-in package – and to lure in customers from other providers. That said, the rise in the Option 1 tariff is expected to hit low usage customers, especially the elderly hardest, as they will be reluctant to switch to an all-in package.

Jason Lloyd, of price comparison site Moneysupermarket.com, says the changes show that BT wants to "penalise those paying per call".

"I would give BT top marks for making their fixed line call plans appear far more attractive. However, it is not so great for those who make daytime calls on Option 1 and who use their phone with BT sparingly," he says.

Steve Weller from uSwitch.com, another price comparison service, said BT's loyal customers would welcome the move.

"It's good to see the cost of international calls falling, but the BT International Freedom package, when taken with Option 3, remains approximately £2.50 per month more expensive than TalkTalk Option 3. BT's package does, however, cover calls to 36 mainland countries compared to the 30 covered by TalkTalk."

BT is also changing the way it charges for calls to 0845 and 0870 numbers, removing the special weekend rate. These calls will now all be charged at daytime rates between 6am and 6pm and evening rates between 6pm and 6am.

"We would like to see BT set an example by including these in its inclusive call packages," says Weller.

Karen Darby, of price comparison website SimplySwitch.com, says: "With these cuts in place, BT currently tops the tables as the UK's best value inclusive call-package provider."

But she urged customers to check their monthly usage to determine whether an inclusive deal is the right deal for them before making any decision.