When to Raise Rates

I’ve been getting the question lately about raising broadband rates. I don’t think there is a decision that smaller ISPs agonize over more than the idea of increasing prices to customers. The question is obviously being raised now due to inflation. Small ISPs see their costs increasing for fuel, materials, and requests from employees for salary increases – and ISPs see margins shrinking.

The current economy is particularly traumatic for newer ISPs who haven’t gone through an inflationary period before. It’s not particularly comforting to them to hear that over the life lifecycle of the economy that periodic bouts of inflation are normal. For most of my career, I’ve seen a recession and a period of inflation roughly every ten years. Inflation was never fun, but it was never unexpected.

We’ve just lived through one of the most unusual economic periods of the last few centuries. Everything we came to expect as normal, like periods of inflation and fluctuating interest rates has not happened for over a decade. The U.S. economy has never had such a stable and ideal period where the economic outlook was completely predictable – and good. Much of what we experienced came through government actions to suppress interest rates, to the point that the federal reserve interest rate even went negative for a short time.

ISPs worry about how customers will react to price increases. ISPs fear they will lose customers to competitors if they raise rates even a little. I can remember working with a client over twenty years ago who agonized for over a year about a $1 increase in telephone rates. They were sure that would drive consumers to drop telephone service in droves. It turns out that nobody dropped telephone service after the rate increase.

I hate to say this, but we can learn a lesson from the biggest ISPs. The big cable companies have been raising rates aggressively for the last five years – not in reaction to higher costs but strictly to drive up profits and improve stock prices. If you look back twenty years, you’ll see the all-in rates for broadband from companies like Comcast and Charter have risen at least $20 per month. The big ISPs are often sneaky about the increases and hide a lot of the rate increases in things like the cost of the broadband modem – but the checks that customers write have gone up every year.

A more salient example is the cellular carriers. Verizon and AT&T both recently announced rate increases – and these companies are now in a highly competitive market. Their reasoning is that they will lose some customers with a rate increase, but the gains from the customers that remain make the increase worthwhile. Small ISPs have to think of rate increases in the same way – you might lose a few customers, but the alternative is to do nothing and watch costs catch up to revenues.

Most other industries don’t agonize about rate increases in the way that ISPs do. If underlying costs go up, the makers of cereal, soap, and most things we buy raise rates to match. It’s always surprised me that very few small ISPs get this. Rate increases don’t have to be large, and an ISP might not be staring at a rate increase today if it had raised rates in prior years by a small amount each year when it was warranted. ISPs seem fixated on the concept that broadband prices must be at a value like $59.99 instead of $61.17. I really don’t know how that idea became so pervasive, but it’s a dumb one. Do ISPs really believe that consumers somehow equate $59.99 with fifty dollars and not sixty dollars? Because of this pricing paradigm, ISPs tend to wait until they have no choice and will raise the $59.99 rate to another magic number like $64.99 or even $69.99.

The need for rate increases during times of inflation is basic math. If your predominant product is broadband, and if costs are rising, you either raise rates or suffer a loss of margin – there isn’t any other alternative after you have done whatever belt-tightening you might do with expenses.

The only other alternative to rate increases is to sell a lot more broadband, but as broadband markets get mature, this gets to be harder to do. We are approaching a nationwide broadband penetration rate of 90%, and at some point, everybody who is willing to pay for broadband will have it.

My advice to ISPs has always been to make small rate increases over time, something small like 25 cents per year, rather than waiting until raising rates is a crisis and dramatic. But if you’ve waited until you have no option but to raise rates, then don’t be timid. Raise the rates to what is needed, and don’t be afraid to explain to your customers why you had to do so.

2 thoughts on “When to Raise Rates

  1. When I joined the regulated telephone monopoly many years ago as a Jr. Engineer, I learned that a prime business strategy was ask the regulators for a rate increase every year. Dismantling of the monopoly and increased competition changed the market dynamics but the rate increase philosophy lives on at the big ISPs. Your recommendation for smaller ISPs to adopt a similar, albeit more modest, rate increase policy makes a lot of sense.

  2. Doug, on a fiber build, with penetration rates being more important than ARPU, I can understand ISPs who want to keep costs as low as possible for uptake reasons. I’m one of them!

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