Customers Still Flock to Promotional Rates

FierceVideo and others recently reported on a survey done in June by the research firm Cowen that looked at consumer use of promotional rates.

Cowen found that 20% of big ISP subscribers are on Internet plans that have promotional rates that will expire within the next 12 months. Another 13% of subscribers are on promotional plans that will expire in a time frame longer than 12 months. Surprisingly, 10% of subscribers have price-for-life guarantees. This leaves just 57% of subscribers paying full price for ISP services.

Promotional pricing is a sensitive topic for the industry and none of the big cable companies or telcos disclose the volume or amounts of discounts they give to customers. The big ISPs are all under a lot of pressure from Wall Street, and one of the key metrics used by analysts to track the big companies is ARPU – average revenue per user. ISPs have hard decisions to make. Giving too many discounts can kill ARPU, but not offering discounts can lose customers and revenues.

Some big ISPs have been working to curtail promotional pricing. AT&T has lost nearly three million video customers in the last year and claims that the losses mostly are due to tightening the promotional pricing that was given in the past by DirecTV. It’s also been reported that Charter has been tightening its policies on promotional prices, and in particular was ending a huge volume of promotional pricing they inherited through the acquisition of Time Warner Cable.

The Cowen report highlighted the difference in discount philosophy varies by ISP. For example, the report said that 45% of Altice customers have a promotional package, Comcast has 42%, and Charter is at 32%.

The big ISPs dole out promotional discounts in a few different ways. All of the incumbent ISPs offer low prices on the web to attract new customers. These new customer discounts generally last for 12 to 24 months before customers are moved to normal pricing. The other big category of promotional discounts is discounts that are negotiated with customers, often when customers threaten to leave an ISP.

The Cowen study confirmed something that we’ve always seen in the market. The promotional prices tend to go to younger subscribers, and older customers tend to pay full price for services. It takes real effort to either change ISPs or to renegotiate pricing every year or two, and only consumers willing to go through that hassle end up with a repetitive series of promotional deals.

The statistic that surprised me was that 10% of respondents in the survey said they had lifetime rates. ISPs have been somewhat leery of using the ‘lifetime rate’ words, but over the years as ISPs increased speeds and prices on their networks they have often allowed customers to stick with slower and less expensive broadband – generally with the caveat that a customer with a grandfathered plan can make no changes without being moved to newer pricing. In my mind, there is a significant difference between grandfathering an existing plan that offers slower speeds than other customers compared to new lifetime sales promotions that offer such deals to new customers. One of the biggest advantages to the ISPs of grandfathered plans is that customers keep these plans for years, meaning no churn.

Small ISPs struggle with promotional rates. Some small ISPs that still offer video offer guaranteed bundled rates for customers who buy cable TV. But I know a number of small ISPs that have ceased offering bundled discounts since the margins on cable TV are too small to afford them.

Small ISPs also generally don’t like the hassle of always having to negotiate rates with customers seeking a discount. Negotiating with customers changes the culture in a call center and adds a lot of pressure to customer service reps – and is probably the number one reason why the public dislikes big ISP customer service.

Many small ISPs have also given up on the idea of having residential service contracts. It’s a major pain to collect from somebody who breaks a contract and drops service. Most of the small ISPs I know feel that their quality of service is superior to the competition and they don’t want to fight to keep unhappy customers.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s