The Mesopotamian shekel is one of the first known currencies, its earliest recorded appearance was 5,000 years ago. Since that time, the practice of earning excess revenue over costs, otherwise known as profit, has become a key driver of growth globally. Today, profitability is firmly woven into the fabric of everything that we consume. Broadband Service Providers (BSPs) could be at risk of losing revenue, without a cohesive pricing strategy. When it comes to profit, margins vary by industry as each one has different operating costs.

Investopedia reported an average 12.5% net profit margin for the telecom sector as of 2022

To avoid the dreaded race to the bottom by being the least expensive, company visionaries need to add value that will motivate loyalty from consumers. Adding value is the act of providing something extra or improving something to make it more valuable to others. Business history proves this when you consider some of the most iconic brands.

Are there more affordable options for coffee than Starbucks, are there less expensive televisions than Samsung or Sony? The big questions are, how can you right-price your services, make an acceptable net profit margin, and cement loyalty among customers?

Before you set a rate for a service based on what the market may or may not bear, a careful and calculated cost analysis should be the foundation for pricing.

One of the most crucial but overlooked aspects of profitability is the ability to leverage your data to gain insights. Whether you are preparing reports for a grant, planning a broadband expansion project, or integrating AI into your operations, your data must give you the ability to create many different views and metrics.

Robert Merii, Director of Finance at Innovative Systems

ACPU & ARPU Calculation

A successful pricing strategy must include Average Cost Per User (ACPU) and Average Revenue Per User (ARPU) in calculations.

Average Cost Per User

The Average Cost Per User Includes all costs to provide service: Backhaul, ETS/T-1 connections to ISP equipment, Domain Service, IP Address Blocks, Technical Support, E-Mail, Video Programming, headend or cloud, Credit/Debit card transaction fees, Labor (Install/Repair), Marketing, Billing and Collections, Administrative, and all other relevant costs. The key to accurate ACPU is to leave no stone associated with the cost of a service unturned.

Average Revenue Per User
Includes all revenue received from a service: installation charges, early termination, trouble/repair trip charges, and monthly recurring charges. Ancillary services, such as routers, modems, and video set-top boxes should be considered. For example, if a router is included as part of the monthly service subscription this should be considered in the ACPU calculation. If you are charging a rental fee on top of the monthly service fee for the router this would be factored into your ARPU.

To arrive at a pre-determined net profit margin, ACPU should be the baseline for rate-setting. It is critical to have ACPU calculations because any services priced below ACPU result in negative net revenue. Right-pricing common net negative services based on their value to the customer along with your more profitable services will paint a healthy financial picture. An important factor is making sure that your lowest-priced service packages are achieving the profit margin that you desire. Behavior dictates that a percentage of consumers will go with the lowest price. Some BSPs have adopted the strategy of setting higher profit margins for their lower-priced tiers of services.

Right Pricing Your Service

Rather than quickly reacting to ads by your competitors, a method should be established. There are three main pricing methodology buckets that service providers are using: Cost-Plus, Market-Based, and Value-Based.

Cost-Plus pricing is where you have a product or service that is highly profitable, in high demand, and consumer response to the price point is positive.

Market-Based pricing considers the competitive landscape of the territory that you serve. Determine if your offering has a premium value that can be added to the pricing. Numerous factors can add value, white-glove customer service can be at the top of the list especially if you have non-local competitors. Fiber versus cable or wireless broadband delivery should be considered as an added or premium value. The biggest challenge with a technology premium like fiber is consumer education. Some BSPs have done a good job marketing the value of fiber by using animation and print pieces that show how a fiber connection of x speed can do consumer web tasks faster.

A Value-Based approach is a deeper dive into what problem a service solves for the customer. For example, a family of four attending just one NFL game or concert in a metropolitan market hundreds of miles away can expect to pay at least $1000 or more. The expense for just one experience equals about six months of service for a bundled broadband and video package from their local provider. The marketing team needs to be on point in educating customers about these added value propositions.

Competitive Considerations

Your competitors know that consumers are always on the lookout for the best service at the best price. In their advertising it is guaranteed they will lead with the promotional price. To compete and still be profitable, a thorough understanding of the competitor’s price must be done. Important questions will be, what does their service at this price include, is it a temporary promotional offer, are their value adds like managed Wi-Fi, is it a contract contingent price? When you do this analysis, you can determine if it is apples-to-apples with your lowest-price service.

Pricing Lifecycle

The two reasons for doing an annual Pricing Lifecycle analysis are to stay strategically aligned with your competitors, and to review the profitability of your service plans. You may find that a once profitable service has become a net negative service, and it may need to be revised or removed. In the case of the previously mentioned video operator that did not raise their rates for 5 years, the service suddenly became profitable, and instead of losing a projected 30% of their video customers, two months into the new pricing they have lost only about 2%.

Products priced below ACPU result in negative net revenue, which means in effect that your company is paying for that end-user to be your customer

Amanda Molina, Vice President of Advisory & Grants Services at JSI

Having the Right Price is More Important Now than Ever

In August of 2022, FCC Commissioner Brendan Carr said the Universal Service Fund (USF) program was “stuck in a death spiral.” He said, “The traditional phone subscriber base has been shrinking so the contribution factor that remaining consumers pay has been on the rise and is unsustainable for those consumers.” Fast forward to July 2024, and we have all read that the US Court of Appeals ruled USF to be unconstitutional. There will likely be a Supreme Court ruling on this, but Commissioner Carr’s death spiral quote regarding this subsidy should be motivation to review the profitability of your services. The creation of a measurement standard with annual ACPU and ARPU calculations will assist in your profit margin decision. Lifecycle analysis that closely monitors competitors and how their offerings stack up against yours will futureproof your services and allow you to adjust as needed.

Right pricing should take into account Market-Based, Cost-Plus, or preferably a Value-Based approach that gives your customers a feeling that they are getting a solution to meet their needs while ensuring a stable financial future for your company.