Fixed Wireless Business

Pricing to Survive

If you have only one price for your service, you're not offering enough. Premium pricing and services are essential to WISP survival.

by Tim Sanders Principal, The Final Mile [June 14, 2005]

Strategy
For most wireless Internet service providers (WISPs), pricing is a thorny issue at best—with providers torn between the proverbial rock of higher costs and the ever present hard place of market competition.

Most of these (usually small) firms need to charge more for their service than the competition does. The difference between the cost of a DSL or cable modem and the cost of a wireless radio alone makes the up front provisioning cost higher. The upshot is that the average provider lives in fear of losing customers to competition, while constantly struggling to charge enough to survive.

But WISPs need not fear if they can provide value to the customer and find the right price point. In order to do so, they need to examine their costs.

Understanding your real costs
A successful business case for WISPs begins with planning—especially pre-deployment planning. Unfortunately, in the rush to acquire gear and other sundry technical toys, too many small WISPs treat financial planning as something they "will get around to."

If any business wants to survive, it must know what it really costs to serve a customer. To most WISP operators, building comprehensive spreadsheets seems complex and daunting. The good news is that the basic concepts are pretty simple. Certainly, every business needs a general ledger spreadsheet, capital expenditure, income statement and more. But most WISP success revolves around one essential spreadsheet—the profit and loss statement model or cash flow plan. Cash flow, good or bad, will make or break the majority of small wireless ISPs.

Please note that this does not mean simply the monthly P&L statement, but a more comprehensive planning spreadsheet modeling the business's cash flow for at least the first three years. Also, a good P&L model sheet does not tell you what price you can charge—rather it tells you what price you must charge to be successful.

For this to work a WISP must model both its fixed one-time costs such as gear purchase alongside its ongoing operational expenses (which are typically at least double those of hardware costs the first year). All of these impact cash flow, which directly impacts how much the WISP must charge to sustain itself. So let's look at some terms important to building a cash flow model (revenue - costs = cash):

Average Revenue Per User (ARPU): This is the average revenue factored across all customers as if each were charged the same price—with some customers charged less and others more. Customer type usually determines price (i.e. business or residential). Raising ARPU is critical to a healthy bottom line. This projected number will tell you how quickly you can reach cash flow break even based on your expected customer counts.

Cost of Goods Sold (COGS): The direct expense costs for acquiring a customer. These typically include one time sales commissions or referral fees—but not salaries or general recurring expenses. Specialty promotional costs (such as rebates) would typically be included.

Capital Expenditure (CAPEX): The gross dollar amounts the business must invest to launch service. This would include vehicles, furniture, tools, network gear, servers, and relay site equipment, usually. It usually includes the customer premise equipment (CPE) although some firms account this as an operational expense. It really depends whether or not the ownership of the CPE is retained by the WISP. It can also depend upon whether or not the gear is leased or bought.

Operational Expenses (OPEX): This includes the daily, monthly, yearly, one time, and recurring expenses to run the business. Salaries, utilities, insurance, advertising, travel, training, leases and other charges involved in staying in business. Also as new services are added that require additional expenses such as salaries, software or servers, plug them in for the projected month when the expense is anticipated. Ancillary items such as payroll related costs also must rise at the same time.

Generally items such as CAPEX are tracked separately. However, for actual cash modeling it is important to include these expenses (they will come out of cash after all).

(New customers) x ARPU + (new customers) x setup fees (if any) + (existing customers) x ARPU = Monthly revenue

Basically each business must multiply its anticipated new customer count each month times the average revenue expected. Add this number to any one time sales such as equipment or services then subtract the COGS for all of these to get new monthly net revenue. Then add any existing recurring subscriber revenues. This is your net monthly revenue.

Price of gear purchased + OPEX + COGS = monthly expenses

At the risk of oversimplifying the model, the WISP must then subtract any incurred capital expenditures such as the price of new routers or new relay site gear bought that month. Then subtract all operational expenses including new ones for new services. This should net a figure showing how much positive or negative cash flow is generated for that month.

Revenue - expenses = CASH

Next subtract or add this number to the cumulative cash expenses expended so far. This will give you the net cash required for the business to date.

As the WISP extends these projected figures out through three years some themes grow noticeable. First, if the business is growing (and it should be) the spreadsheets will demonstrate in which month the business becomes cash flow break even. This is usually the point where the total cash required for the business will peak (excepting larger CAPEX expenses for later initiatives). As positive cash flows progress, the total cash expended will also start to decrease. The modeling spreadsheet will reveal this number.

What do you do however, if the number of months your model takes to show cash flow break even and the total cash required to that date exceed the business's ability to sustain itself? This is the point where premium pricing becomes important.