Jedi Marketing: Using "the Force" of Margins

In this article, we'll deal with the questions that many business owners, especially new ISP owners, face when shaping their company to compete with more experienced and better marketed operations.

by Kevin Beauchamp

Almost anyone with a dream and a few thousand dollars can hang their ISP shingle on the virtual marketplace wall and be open for business offering ISP services. But just how 'competitive' are many of these upstart companies? How competitive are the established ones — really? What kind of competitive atmosphere does this create within our industry? If you're a new player or even an industry veteran, can you survive or continue to survive in the marketplace with your current standards of marketing?

In this article, we'll look at some answers and some basic misconceptions that many business owners, especially new ISP owners, make when shaping their company to compete with more experienced and better marketed operations.

We are legion
Our industry is home to one of the largest concentrations of novice business owners ever assembled. Like the California gold rush in the 1800's, thousands have flocked to the Internet, and specifically the ISP business, to stake their claims and scrape out a living from our exploding markets without really knowing the ins and outs of how to run this business (or any other business for that matter).

With low barriers to entry and wholesale reseller networks offering local, regional, and national dialup for negligible fees, the door is open for a lot of unseasoned, unprofessional (even shady) business operators to setup shop.

For the record, it's not my intention to belittle or impugn novice ISP owners. On the contrary, more power to you.

But let's face it, most of us started our companies in our twenties or thirties and a lot of us are business and marketing Neanderthals; we make do with what we have. A great many new ISP operators, even those who have been in business for several years with customer bases in the tens of thousands, really do not have the marketing knowledge to know why they've done well in the past or how they will succeed in the future.

In an exploding market, such as the one we've enjoyed for the past four years or so, it's easy for just about anyone to compete. The easy days, however, are now numbered

Our explosive market has created, for lack of a better term, an almost amateur (competitive) landscape. With this much business ignorance in our industry, we all find ourselves under a lot of 'artificial' competitive pressure. The base reason for this is that many unseasoned business people typically only know one way to compete — by cutting prices. They rationalize that by lowering fees, they will be able to gain market share. What they don't realize is that there are better ways to compete and price cutting inevitably leads to what more seasoned professionals call — the 'death spiral.'

Avoiding the death spiral
The first thing that typically comes to mind with folks entering a new industry and setting up shop always seems to be, "I can provide better service for less than these other guys."

This is a serious misconception. Your competitors have likely been in business for years and know what the "real" costs of providing truly good service are. Unless you have a clearly defined strategic business plan for undercutting your competition, taking the lower cost approach to marketing your business only leads to a death spiral that will eventually ruin your ability to market your business properly and compete with top service operations.

Sure, many companies begin life with temporary sales to build some initial market share quickly, and numerous companies do compete solely on price while trying to build huge volume to make up for their razor-thin margins.

While these strategies do have merits, they're most often done professionally, with careful cost analysis, and under the aegis of a well padded bank account to keep the company afloat while sales build. Few small ISP owners have these resources, and even the best low-cost strategic planning can fall way short.

The best examples of low-margin competitors are the free ISPs. The poster child of these free services is of course NetZero, whose attempt to undercut an entire industry without adequate, industry standard margins resulted in disaster. NetZero is now public, with a rock-bottom stock price, dwindling cash reserves, and a curious scarcity of new VC funding.

All of the free services are essentially working from less than adequate margins — in other words, they're all losing money.

In a recent discussion with some executives of a major national network at Spring ISPCON this year, I was asked what we were billing for our dialup services. When I said $21.95 for unlimited you could have pushed everyone over with a feather. There were looks of stunned shock from the group. "How can you bill that much and still survive with all of this competition?" was essentially their question. My answer was simple and seemed to mystify them even more, "How can you survive by not charging this much?" Our industry standard margins have allowed us to weather a lot of unforeseen turmoil.

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