There are three billing practices that are routine for the large ISPs that smart competitors avoid. First is offering special low prices to attract new customers. The second is bundling, which means giving a discount to customers buying multiple products. Third is what has become known as hidden fees, where there are routine monthly fees that are not included in the online advertised price offers to customers.
A lot of smaller ISPs wonder if they should match these same tactics. The argument for copying the tactic is that it allows advertising rates that can be compared to what the big companies advertise. The main argument against matching these tactics is that the practices are deceptive, and customers have made it clear that they don’t like these tactics. Fiber overbuilders tell me that the first customers they win in a new market are those who feel deceived and mistreated by the bigger ISPs.
Big ISP online advertising has felt sleazy for many years. I wrote a recent blog where Charter in Los Angeles offers customers drastically different introductory rates depending upon neighborhood – with the highest rates being offered to the neighborhoods with the highest level of poverty. It’s common to see broadband specials advertised for less than half of the list price. A customer has to click through multiple levels of footnotes to find out the rate at the end of the special – if it is online at all. It’s not hard to think that somebody could be attracted to low rates without understanding that big increases will be coming in a year or two.
Bundling is an interesting pricing strategy. Customers are given a discount for buying multiple products but are never told which products get the discount. If a customer tries to drop one of the bundled products, they inevitably find that the dropped product had all of the discount and the customer usually ends up paying full price for the products they don’t drop. This tactic is intended to bully folks into not breaking the bundle.
Hidden fees are just plain sleazy. A customer buying an online cable product will get socked with a range of hidden fees on the first bill. While they thought they were buying a $40 cable package, the first bill could easily be $60 or $70. The most common hidden fee for broadband is usually a high rate for the cable modem, which can be over $15 per month. Even more expensive are data caps, which can significantly add to the monthly bill.
The majority of the small ISPs I work with don’t use these tactics. They understand that these tactics are what drive consumers to seek them out. Most of the small ISPs I know have the philosophy of charging the same fair rate all of the time.
But I’ve seen ISPs that start with the simple, fair rate philosophy and get sucked into offering discounts to try to win new customers. Their marketing folks become convinced that matching the big company techniques is the only way to get new customers. I’ll grant that mimicking the big guys is probably the easiest sales technique, but acting like the big ISPs is a poor long-term tactic for many reasons.
- Promotional rates tell customers that rates are negotiable, and once an ISP goes down that path, customers will ask for breaks forever. Many consumers are used to negotiating with the big ISPs and will do so with the small ISP as well.
- These tactics tell customers that your rates are too high and that the real rate is the discounted rate. Customers who are too timid to negotiate for lower rates feel cheated.
- Unplanned discounts can be devasting to cash flows and meeting financial objectives. If your business plan and budgets are based upon a specific set of rates, then giving discounts lowers the average revenue per customer. Do the math and consider what happens if the average revenue for all of your customers drops by $5 or $10.
- Matching the big ISP tactics also attracts customers who will drop an ISP for a small discount elsewhere. Every few years, they will compare you against the competition and will take the best offer. ISPs with fair rates tell me that they rarely lose a customer to special rates – and that might be because they don’t attract customers who get a thrill out of bartering.
- Finally, special discounts complicate your dealing with customers. The ISP now has to track when special promotions are finished and notify customers that rates will increase. This likely means having to talk with most of your customers, and calls to the call center will skyrocket. It’s important to remember that most customers view the perfect ISP as one they never need to talk with.
I’m a huge fan of keeping things simple because I have seen so many ISPs that thrive with the philosophy. The danger of mimicking the big ISP tactics is that the public will see you as just another untrustworthy ISP.