An Attempt at Economically Rational Pricing: Time Warner Trial

Sun Jan 20 18:48:34 UTC 2008

> I think the point is that you need to get buyers to segregate =
> themslevesinto two groups - the light users and the heavy users. By =
> heavy users I mean the 'Bandwidth Hogs' (Oink, Oink) and a light user =
> someone like myself for whom email is the main application. Afterall the =
> problem with the current system is that there is no segregation - =
> everyone is on basically the same plan.=20

Well, yes.

> The pricing plan needs to be structure in a way that light users have an =
> incentive to take a different pricing plan than do the heavy users.=20

Using the local cable company as an example, right now, I believe that
they're doing Road Runner Classic for $40/mo, with Road Runner Turbo for
$50/mo (approx).  Extra speed for Turbo (14M/1M, IIRC)

The problem is, Road Runner is delivering 7M/512K for $40/mo, which is
arguably a lot more capacity than maybe 50-80% of the customers actually
need.

Ma Bell is selling DSL a *lot* cheaper (as low as $15, IIRC).

So, does:

1) Road Runner drop prices substantially (keep current pricing for high
   bandwidth users), and continue to try to compete with DSL, which could 
   have the adverse side effect of damaging revenue if customers start
   moving in volume to the cheaper plan,

2) Road Runner continue to provide service to the shrinking DSL-less service
   areas at a premium price, relying on apathy to minimize churn in the
   areas where Ma Bell is likely leafing every bill with DSL adverts,

3) Road Runner decide to keep the high paying customers, for now, and try to
   minimize bandwidth, and then deal with the growth of DSL coverage at a 
   future date by dropping prices later?

Option 1) is aggressive but kills profitability.  If done right, though, 
it ensures that cable will continue to compete with DSL in the future.
Option 2) is a holding pattern that is the slow path to irrelevancy.  
Option 3) is a way to maximize current profitability, but makes it 
difficult to figure out just when to implement a strategy change.  In 
the meantime, DSL continues to nibble away at the customer base.  The
end result is unpredictable.

I'm going to tend to view 3) as the shortsighted approach that is also
going to be very popular with businesses who cannot see out beyond next
quarter's profits.

The easiest way to encourage light users to take a different pricing plan
is to give them one.  If Road Runner does that, that's option 1), complete
with option 1)'s problem.  On the flip side, if you seriously think that 
$40/month is an appropriate "light" pricing plan and high bandwidth users 
should pay more (let's say $80/), then there's a competition problem with
DSL where DSL is selling tiers, and even the highest is at least somewhat
cheaper.

That means that the main advantages to Road Runner are:

1) Availability in non-DSL areas,

2) A 14M/1M service plan currently unmatched by DSL (TTBOMK).

That latter one is simply going to act as a magnet to the high bandwidth
users.

Interesting.

... JG
-- 
Joe Greco - sol.net Network Services - Milwaukee, WI - http://www.sol.net
"We call it the 'one bite at the apple' rule. Give me one chance [and] then I
won't contact you again." - Direct Marketing Ass'n position on e-mail spam(CNN)
With 24 million small businesses in the US alone, that's way too many apples.