TMNG Global Assesses the Impact of DSL Pricing on Market Share and Profitability
Challenge
The client planned to raise its consumer DSL prices in order to cover costs more effectively and to demonstrate to Wall Street that DSL could prove profitable. At the same time, competitors offering cable modem service threatened the client’s DSL business. The cable companies were using a “land grab” strategy that emphasized customer acquisition rather than profits. These competitors also appeared to have lower costs and were thus under less pressure to raise end user prices.
TMNG Global was asked to assess the impact of the price change in several key areas:
- Competitive situation: impact on deployment in the contested markets and on pricing for cable modem providers, DLECs, and ISPs
- Customers: impact on client market share
- Business planning: impact on customer counts, ARPU, revenue, gross margin, and EBITDA.
The analysis built on secondary research as well as on primary research with competitors, industry experts, and consumers. CSMG leveraged an existing financial model that it had developed for the client’s DSL business overall, incorporating the proposed new pricing and an estimate of the price elasticity of demand developed specifically for this analysis.
TMNG Global Solution
Two consumer market research studies were completed for this project. One entailed interviews with 800 households considering purchase of broadband access service within the next 12 months. The survey was performed in four major markets in four different states. This study assessed the price elasticity of demand for DSL in isolation, using price points ranging from $49.95 to $29.95. A second study involved interviewing 400 households to assess the price elasticity of DSL given a cable modem alternative. DSL prices tested were $49.95, $44.95, and $39.95, with cable modem prices ranging from $44.95 to $29.95.
In both studies, respondents were asked to rank the importance of price in their selection of a broadband Internet access provider. A low price was viewed as important, but less so than reliability:
Two different price elasticities emerged from these studies, depending on whether the end user could choose a cable modem option or not. CSMG used a weighted average of the two elasticities to reflect the overall elasticity within the client’s region (where cable competition existed in some areas but not in others). Using a conservative elasticity estimate, we determined the number of foregone gross adds. These estimates were then applied to the existing DSL business case, and resulting economics showed that although customer totals would shrink, revenue would show much less impact (due to increased ARPU). EBITDA actually rose under the new pricing plan.
Benefits to the Client
A major client concern was focused on the possibility that others in the industry would retain their present prices, and that the market would resist a higher price point so strongly that the client would need to reduce its prices. Our team did not expect that result, but the financial analysis was based on very conservative assumptions; in particular, that cable modem prices would not also rise. Based on interviews with knowledgeable industry leaders, TMNG Global believed that cable company strategy was oriented toward adding subscribers for cable modem service, rather than on achieving a viable (profitable) business. Since cable company costs were viewed as lower than those for the client’s DSL offering, a price increase appeared unlikely.
The sensitivity analysis did consider, however, the possibility that the client would in effect become the price leader, and that the rest of the industry would follow with price rises of their own. In fact, after DSL prices rose, cable companies immediately increased their prices, although not quite to the DSL level. The client’s new price point rapidly became the industry norm, and competitive losses were lower than anticipated because the price discrepancy was small.