Pricing Your Services    Part 2  - continued

Ancillary service costs
E-mail accounts and personal web page hosting make up a very small part of the cost of a dial-up user. The amount of bandwidth per user, per e-mail account/web page per month is so negligible that you can consider it paid for in the Internet access cost. (If you want to figure out the exact bandwidth cost, look in the web hosting pricing section of this column.) What is important is the machine the e-mail boxes/web pages are hosted on. If a box costs $3,000, and you consider a 12 month depreciation schedule, and you can put 1000 users on each box, then your cost per month, per user for e-mail and web hosting is

Here is the math:

• $3000/server / 12 months = $250/month
• $250/month / 1000 users = $0.25/month/user

Once you have the cost for PPP access, and e-mail and web page hosting cost, you need to figure out your support and overhead costs. The cost for support is very hard to calculate because you need to know what percentage of your overhead is attributed to dial-up access.

Support costs
Technical support and customer service are the easiest to figure out. The ratio of users to technical support or customer service staff is a basic business decision, as it affects the quality of your overall service. It also varies depending on what type of service your business is built around (higher ratio for ISP that sell primarily dial access) and, to a lesser extent, your service area.

In order to figure out the cost, you add up the number of man-ours, times the cost per man-hour, plus your overhead per person. In order to find your overhead cost per person (or per desk), add up all your costs for lights, phones, rent, etc. and divide it by the number of employees/desks. This number will be slightly skewed, as some areas (sales and the like) may make more phone calls then others, but will give you an average cost.

Example:
One technical support/customer service representative is taking care of 750 users. The rep is being paid $10/hour and is working 40 hours/week plus benefits. Your total operations cost is $10,000/month, and you have 20 people working.

Here is the math:

• $10/hour * 40 hours = $400/week
• 4.33 weeks/month * $400/week = $1,732/mo.
• 33% (benefits, taxes, etc.) * $1,732/mo. = $571.56/mo in benefits, taxes, etc.
• $571.56/mo in benefits, taxes + $1,732/mo. in salary = $2,303.56/mo in total compensation
• $10,000/mo / 20 people = $500/person/month in overhead
• $500/mo in overhead + $2,303.56 in total comp = $2,803.56 /mo in total cost for that rep $2,803.56 /mo. /750 users = $3.74/user in support cost

Customer acquisition costs
The cost of acquiring new customers—via marketing or purchase—is one you'll probably be acutely aware of. But how to treat these costs in terms of ongoing operating expenses is less obvious.

One simple solution is to set up a depreciation schedule, just as with equipment, and consider it a cost over that period of time: i.e. if you had an average customer acquisition cost of $60, and had a depreciation schedule of 12 months, you would add $5 in cost per user per month.

There is a another school of thought on customer acquisition schedules: AOL at one time had a customer acquisition cost of $160/user. The only way to write off that cost without doing a depreciation schedule—which would make the cost per user much too high—is to treat it as an investment and assume you'll make back the acquisition cost when you sell your ISP. I don't recommend this type of 'creative' accounting, but it has been done, and will probably be done many times again.

—End

back to the top of the article

Part 1 - Dial Access Basics
Part 3 - Web Hosting
Part 4 - Dedicated Access

Feedback? Drop a line to the author or the editors.