Best of the ISP-Lists

Nobody Pays Luxury Prices for a Camry

Members of the ISP-Marketing list discuss how to make dialup more than just a commodity. How can you provide the type of service that will enable you to charge Cadillac prices?

[April 17, 2001]

On the ISP-Marketing list in April, CW asked,

"What is the 'Cadillac' solution, and why aren't you selling it? Suppose you raised your rates to fifty dollars and added some services. If you tripled your margin and lost half your customers, you'd still have increased your profits by fifty percent. What would you need to deliver to make your ISP services worth fifty dollars per month?"

BL noted that the question is really whether dialup is a service or a commodity:

"Dialup access has become a commodity in the minds of many consumers, and when something is viewed as a commodity, it has a limited price range. You may be able to operate with dialup pricing at up to 25% above the norm ($19.95 per month). After that, you would lose more opportunity than you would gain through increased margins.

If you raised your price to $50 per month, I predict that you would lose about 90% of your customers, so your margins would actually decrease. The trick is to create the perception in the customer's mind that your service has a premium value, and that's very hard to accomplish with dialup."

EA observed that bundling services can help, but that it's extremely difficult for small ISPs:

" ISPs must bundle goods and services to make themselves so much a part of the customer's life that he/she will never leave. Then price doesn't matter, as long as the customer perceives that he/she is getting a great deal.

The problem is that the small ISP is too small for most suppliers to be interested in. It takes a lot of time and effort to find valuable services and to negotiate a deal with a supplier, assuming they'll talk to you in the first place. That is why most of us will not be successful in doing what you are suggesting, even if we had the time and the inclination to do so."

From status symbols to content delivery, other respondents offered alternate ways to increase value:

[MV contended] "You can charge Cadillac prices, but you have to make sure you're giving people a Cadillac: nobody pays luxury car prices for a Camry. People buy luxury cars because they're status symbols. Is Internet access a status symbol? If people pay the cheapest price for other communications (i.e. long distance, cell phones) wouldn't the Internet fall into that category? Or could it be like cable, where people will pay $150 a month for 500 channels they'll never watch?"

[EA suggested] "An ISP is in the content distribution business, just like a magazine or newspaper publisher. The essential element is information. If an ISP is to survive, it must start seeing itself as an information provider, combining interesting design and technology with accurate information that has value to the subscriber and is engaging, absorbing, entertaining and timely."

[DL added] "You might get away with charging $50 if you brand the heck out of it as 'mission-critical Internet.' You'd have to maintain amazing user to modem ratios and have all kinds of backups in place. You'd have to provide your users with at least two access numbers in each location, each of which would be handled by a different LEC with different equipment in different locations; there'd have to be generators behind every box in your arsenal; and you'd want to have multiple upstream feeds on truly physically diverse paths. You'd also want 24/7 live human eyes on the network.

The bottom line is, no outages and no busy signals, period. It's quite possible, but very expensive. My guess is that the cost of such a network would leave little margin on $50 per month, so you'd burn lots of capital for almost no improvement in your cash flow or operating margin."

[Ed. note: One ISP in Florida offers "dedicated dialup" (modem ratio of 1:1) for $125 per month. Many others also offer this service. Here's one more . ]

CW argued that there's great value inherent in the Internet alone:

"It costs me more than fifty dollars to take a family of four to the movies once (about $6.50 per person hour). My sons would use the computer for more than four hours a day if I'd let them. I'd only pay seventy cents per hour (fifty dollars divided by twenty days times four hours). Using the Internet is entertaining and valuable. Why isn't it worth more?"

— End