The Facts Behind Dialup Pricing

An executive at an outsourced ISP services provider explains how ISPs price dialup, and why price can vary so much between ISPs.

by Guy Decatrel [November 1, 2004]

As VP of Sales and Marketing for ISP and outsourced ISP services provider Brand X Networks, Guy Decatrel consults with prospective Virtual Internet Service Providers (VISP), existing VISPs, or ISPs about price and pricing strategies. These strategies range from low-price providers that believe such strategies are necessitated by the highly competitive ISP environment, to higher priced providers that compete in the higher price range for a variety of reasons. .

The following factors affect pricing in most industries, but do not affect pricing in the dialup ISP industry:

Volume: There is usually no volume or bulk buying associated with ISP dialup sales to end users. Sales are usually per user, minimizing bulk-buying discount opportunities to lower price. As such, a volume discount is usually not an ISP price-setting element. Some ISPs do offer discounts to users who commit to longer contracts, such as a year instead of a month, but the ISP realizes no direct bulk discount from this transaction.

Service Complexity: Nor is service complexity a contributor to pricing strategy. This is because understanding and using ISP services is not really a challenge to most users. Additionally, most ISP basic offerings are mirror images of each other.

Delivery: Unlike hard-mail services (like USPS, Fed Ex, UPS, etc.), where customers may want quicker delivery options, ISP service delivery is commoditized by the fact that most service providers can provision service in a half-hour or less. This negates any opportunity for extracting higher prices from customers that may want rapid service turnaround since there is no or little industry services delivery differentiation that merits such extraction. Guaranteed up-time may be another issue, however, since some users need their services for a variety of reasons.

Relationships: It also seems that relationships contribute little to price elasticity, since users only call their ISP when they need technical support. There is, however, some connection between the quality of technical support and customer satisfaction. This is not to say that users do not value relationships with a good service provider. It's just that this is a nebulous area when it comes to pricing. It is usually seen as more of an intangible competitive edge.

The forces that actually affect prices in the dialup industry are somewhat unusual. Companies will adapt their price to varying conditions in the marketplace. Here are the factors that come into play:

Supplier power: This is a clear determinant of price, as seen with the larger ISPs as AOL, Earthlink, et al. As the major players holding the larger market share, they can more easily determine price. Smaller ISPs, however, do not wield such command, reducing them to the commodity level at this option. The strength of upstream industry suppliers can be another type of supplier power affecting price, margins, competitiveness, and profit. If you are the only supplier, as in a remote area, your prices can be higher.

Price competition: Some might agree that competitive pressures to be low-priced are a determinant for pricing ISP services. This strategy is likely difficult against a competitor who truly has low cost as a business competitive strategy that is truly a low cost focused for every business process. You cannot be a low cost provider if you cannot compete on the same low cost process (fixed, variable, and total costs) and operational basis. Lowering price without reducing costs leads directly to marginal or break-even results, or even recurring losses.

User power: Consider the user's ability to extract lower prices. The user can obtain a lower price via bargain shopping. The user may try hard negotiation or seek concessions that augment the core offer are sought. Yielding to such tactics enhances value to the user and lowers the supplier's price and profit margin. Not a good place to go.

Word of mouth: Support for an ISP, or angry complaints against it, are a real factor in this market. A trend for the past 5 or 6 years, this directly affects purchase decisions and pricing strategies.

Relationships: As mentioned above, technical support generates loyalty, and it also generates positive word of mouth stories about an ISP.

Promotional pricing: A company can opt for special-event pricing, loss leader pricing, first-month free offers, discounted packages if the user pays up-front for a period, like with a one-year period. This is not pure price competition, placing the ISP as the cheapest option. Instead, the goal is to capture loyal users and reward them with a discount.

Differentiation: Many ISPs operate in niches, where they profitably serve a small number or groups of customers. They specialize in understanding the niche or group's needs and position themselves as solutions providers in their sectors. Users are thus willing to pay higher prices for their services as a way to reduce complexity and to minimize risk, while maximizing their productivity, efficiency, and profitability.

Discriminatory pricing allows a business to establish different pricing for different service bundles, customer segments, brands, and customer locations to achieve business strategies.

Value added services can also help an ISP differentiate itself from the competition, raising prices and profit.

When an ISP considers pricing—especially if it's considering changing the prices it charges—it must think about its customers. They are influenced by what the price or price change signals. What are the intent and the likely duration of the price change? What is the customer demand estimate?

The ISP must also consider competitive reactions. Such reactions flow from competitors' strategies or from fresh situational assessment of each challenge. The ISP may preplan its reactions (maintain price, reduce price, raise perceived quality, increase perceived value, start a low-price fighter line, increase price, and improve quality) to different possible competitor scenarios or price reactions.

Capturing value in an increasingly commoditized world is difficult. An ISP that can differentiate its service and offer perceived value is clearly on the path to profitability.

—End