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Pricing Strategies

One of the things that new ISPs always struggle with is pricing, and I’m often asked advice on the right pricing strategy. It’s not an easy answer and in working across the country I see a huge range of different pricing strategies. It’s really interesting to see so many different ideas on how to sell residential broadband service, which is fundamentally the same product when it’s offered on a fiber network. The following are some of the most common pricing strategies:

High, Low, or Market Rates? The hardest decision is where to set rates in general. Some ISPs are convinced that they need low rates to beat the competition. Others set high rates since they only want to sell products with high margins. Most ISPs set rates close to the market rates of the competitors. I sat at a bar once with a few ISPs who argued this for hours – in the end, the beer won.

One Broadband Product. A few ISPs like Google Fiber, Ting, and a handful of smaller ISPs offer only a single broadband product – a symmetrical gigabit connection. Google Fiber tried going to a 2-product tier but announced this year that they’ve returned to the flat-rate $70 gigabit. The downside to this approach is that it shuts out households that can’t afford the price. The upside is that every customer has a high margin.

Simple Tiers. The most common pricing structure I see offers several tiers of prices. An ISP might have three-tier offerings at $55, $70, and $90, ranging from 100 Mbps to gigabit. Generally, such prices have no gimmicks – no introductory pricing, term discounts, or bundling. There are still ISPs with half a dozen, or even more tiers this would confuse me as a customer. For example, I don’t know how a customer would be able to choose between buying 75 Mbps, 100 Mbps, and 125 Mbps.

ISPs with this philosophy differ most by the gap between pricing tiers. Products could be priced $10 apart of $30 apart, and that makes a significant statement to customers. Small steps between tiers invite customers to upgrade, while bigger steps between tiers make a statement about the value of the faster speeds.

Low Basic Price. I’ve seen a number of ISPs that have a low-price basic broadband product, but otherwise somewhat normal tiers of pricing. This is done more often by municipal ISPs trying to make broadband affordable to more homes, but there are commercial ISPs with the same philosophy. As an example, an ISP might have an introductory tier of 25 Mbps for $40. This pricing strategy has always bothered me. This can be a dangerous product to offer because the low price might attract a lot of customers who would otherwise pay more. I’ve always thought that it makes more sense to offer a low-income product only to homes that qualify in some manner but give them real broadband.

Introductory Marketing Rate. Some ISPs set a low introductory rate for first-time customers. These rates are generally good for one or two years and customers routinely sign contracts to get the low rates. The long-term downside of this pricing philosophy is that customers come to expect low rates. Customers that take the introductory rate will inevitably try to renegotiate for continued low rates at the end of the contract period.

An ISP with this pricing structure is conveying some poor messages. First, they are telling customers that their rates are negotiable. They are also conveying the message that there is a lot of profits in their normal rates and they are willing to sell for less. Customers dislike the introductory rate process because they invariably get socked with an unexpected rate increase when rates jump back to list prices. The time of introductory discounts might be coming to an end. Verizon recently abandoned the special pricing strategy because it attracts low-margin customers that often leave at the end if the contract period.

Bundling. This is a pricing strategy to give a discount for buying multiple services and has been the bread and butter for the big cable companies. Bundling is making less sense in today’s market where there is little or no margin in cable TV. Most small ISPs don’t bundle and take the attitude that their list prices are a good deal – much the same as car dealers who no longer haggle over prices. In order to bundle, an ISP has to set rates high – and many ISPs prefer to instead to set fair rates and not bother with the bundle.