How Smart are Promotional Rates?

I think the big ISPs are recognizing the impact that special promotion rates have on their bottom line. Promotional pricing is the low rates that cable companies offer to new customers to pry them away from the competition. Over the years promotional rates have also become the tool that cable companies use to retain customers. Most customers understand that they have to call the cable company periodically to renegotiate rates – and the big ISPs have routinely given customers a discount to keep them happy.

We’re finally seeing some changes with this practice. When Charter bought Time Warner Cable they found that Time Warner had over 90,000 ‘special’ pricing plans – they routinely negotiated separately with customers when they bought new service or renegotiated prices. Charter decided to end the practice and told most former Time Warner customers that they had to pay the full price at the end of their current contract period.

We’ve seen the same thing with AT&T and DirecTV. The company decided last year to eliminate the special discount on DirecTV and DirecTV Now. When the discount period ends for those products the company moves rates to the full list price and refuses to renegotiate. The practice cost AT&T almost a million customers just in the first quarter of this year. But AT&T says that they are glad to be rid of customers that are not contributing to the bottom line of the company. I’ve seen where the CEOs or other big ISPs like Comcast have said that they are considering changes in these practices.

At CCG we routinely examine customer bills from incumbent ISPs as part of the market research of helping ISPs entering new markets. While our examination of customer bills has never reached the level of equating to a statistically valid sample, I can report that the vast majority of bills we see have at least some level of discount. In some markets it’s rare to find a customer bill with no discount.

The discounts must accumulate to a huge loss of revenue for the big ISPs. The big ISPs all know that one of the only ways they are going to be profitable in the future is to raise broadband rates every year. The growth of broadband customers overall is slowing nationwide since most homes have broadband, although Charter and Comcast are still enjoying the migration of customers off DSL. The ISPs are continuing to lose revenues and margins as they lose cable and landline voice customers. Most US markets are seeing increased competition in broadband services for businesses and large MDUs. There’s not much left other than to raise residential broadband rates if the big ISPs want to satisfy the revenue growth expected by Wall Street.

If the big ISPs phased out promotional discounts it would probably equate to a 5% to 10% revenue increase. This is something that is becoming easier for a cable company to do. Many of them have already come to grips with cord cutting, and many are no longer fighting to keep cable customers. Cable companies are also less worried over time about customers leaving them to go back to DSL – a choice that is harder for consumers to make as the household need for broadband continues to climb.

Most ISPs won’t make a loud splash about killing discounts but will just quietly change policies. After a few years, I would expect customer expectations will reset after they realize that they can no longer extract discounts by threatening to drop service.

I’ve always advised my fiber overbuilder customers to not play this game. I ask clients if they really want to fight hard to win that slice of the market of customers that will change ISPs for a discount. Such customers flop back and forth between ISPs every two years, and in my opinion, companies are better off without such customers. Churn is expensive, and it’s even more expensive if an ISP provides a substantial discount to stop a customer from churning. Not all of my client agree with this philosophy, but if the big ISPs stop providing promotional discounts, then over time the need to do this for competitors will lessen.

This is certainly a practice I’d love to see slip into history. I’ve never liked it as a customer because I despise the idea of having to play the game of renegotiating with an ISP every few years. I’ve also hated this as a consultant. Too many times I’ve seen clients give away a huge amount of margin through these practices, giving away revenue that is needed to meet their forecasts and budgets. It’s dangerous to let marketing folks determine the bottom line because they’ve never met a discount they don’t like – particularly if they can make a bonus for selling or retaining customers.

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