In every industry, there are buzz words businesses know they can use to draw consumers to their product or service. In the auto industry, it’s zero percent financing and no money down. In the restaurant industry, it’s All-You-Can-Eat and 50% off. In the retail industry, you’ll see the term “BOGO” used to draw consumers with the thrill of getting a second item either free or heavily discounted. But with all the hype, consumers are still left with a couple of truths.
The first truth is found right in their name. They are consumers and their economic role is to consume products and services. Looking at the example of the restaurant industry, at an average of $11.99 for an All-You-Can-Eat buffet the restaurant will make approximately $7.99 because all you can eat is about $4 worth of food on average. The average person can only eat a certain amount of food before they literally will cease to be able to swallow.
Though the restaurant offers unlimited experience, they don’t have an unlimited supply. This, of course, is not a concern to them though because they know from the start you have a limited demand. Therefore, their marketing is only true in the fact that 2-3 plates are really all you CAN eat and that’s what they prepare for. A restaurant will seat approximately 120 people on an average night. At a maximum of 3 plates multiplied by 120 consumers, the restaurant will prepare enough food for 360 plates. But here’s the secret to the most profitable buffet restaurants. Their popularity for being All-You-Can-Eat will draw 150 consumers per night but they’ll still only prepare for 120.
Data Caps Vs. Unlimited Internet
This leads us to our second consumer truth. We are not only limited in the amount we can consume but we are also limited in the area of time. We only have so much time to consume things. We are busy people with places to go and things to do. Staying with the example of the restaurant industry, the average consumer in North America will only want to spend on average 60 to 90 minutes at a restaurant including the time it takes to be seated and to pay.
This is how the buffet is able to handle 150 consumers on supply for 120 consumers. They limit the amounts they put out and slow down their replenishing time. Due to longer wait times, it slows down our consumption to 2.4 plates instead of 3 plates. Quick math shows the secret.
120 Consumers x 3 plates = 360 plate supply with an equal demand
120 x $11.99 = $1438.80
150 Consumers x 2.4 Plates = 360 plate supply with an equal demand
150 x $11.99 = $1798.50
The consumer’ experience is reduced by 20 percent but the restaurant’s pockets are increased by 20 percent because they slowed down their service in order to offer an unlimited experience. But what if the same restaurant capped everyone at three plates but never slowed down the replenishing time? They could keep all the food trays full and if anyone took more than the three plates they’d be charged $1 for every pound of food taken passed the three plate cap.
150 Consumers x 3 plates = 450 plate demand with an equal supply
150 x $11.99 = $1798.50
The restaurant won’t make as much due to the increased supply but the consumer has a better experience because the supply and demand is balanced. “Unlimited Bandwidth” Internet Service Providers
The ISP industry has its own version of the All-You-Can-Eat buffet called Unlimited Data or Bandwidth. Much like the restaurant’s example, they bank on the fact the average user will only consume a reasonable amount per month due to their need and time available. For customers that take advantage of the system, they still offer unlimited bandwidth but control the consumers’ demand by slowing down or throttling the supply.
Think of it like a water faucet. I tell you that you can use as much water as you want, so you open your tap all the way and let it flow. I notice you’re using more than I anticipated so instead of telling you to slow down your usage, I slow the supply down. You can still use every ounce of water that’s coming out of your tap but instead of receiving a gallon per hour now you receive a liter. It’s technically unlimited but it’s actually being controlled by throttling.
Another business model utilized by Internet Service Providers is one that provides set amounts of bandwidth per package called “Data or Bit Caps”. This is similar to our example above of the buffet which allows the customer 3 plates of food for $11.99. Based on the average consumer’s usage, the bandwidth is set at a base number of GBs per month at an unthrottled speed It’s the consumer’s responsibility to monitor their usage in order to stay within their data cap. If they go over their data cap, a fee will be charged per GB they exceed their limit. These are called overage fees.
Because the Provider chooses not to throttle down the speeds of the package, there must be a deterrent in place for people not exceed their Data cap and abuse the network, slowing all the other consumers down. Most providers call this a “Fair Access Policy”. The policy is in place to help even out the traffic across the network in order to provide the best service experience possible. In other words, it’s there to keep the supply and demand balanced for all consumers.
With the constant expansion of services offered and with technology increasing the size of every new product, data consumption is at an all time high. In some cases, it’s not even a change in the consumer’s use of the internet but the requirement of an internet connection to other products such as Smart TVS and gaming systems that have caused the spike in data consumption. These changes have a noticeable effect on both business models for Internet service providers.
For those with unlimited packages, they have had to increase their throttling to keep a balance of their supply and demand which upsets their customer base but billing has stayed the same. For those with data caps, their service has stayed consistent but excessive overage fees have customers frustrated come billing time. The consumer is forced to either limit their usage or decide between high overage payments or unreliable service.
WaveDirect uses data caps for our packages because we have always been firm on not sacrificing our service quality over being the lowest priced provider. Saying that we have noticed a huge jump in overages and the fees they incur. Currently, our overage fee is $1.50 per GB used over any packages data cap. That means if a customer uses 4 GB more (approximately one movie on Netflix) than their data cap, it will cost them $6. Our solution to this growing issue came about by asking a simple question.
In 2014, our customers averaged around 11 GB of overages per month which came with a fee of $16.50. One solution to this would have been to upgrade everyone up one package which would increase everyone’s bill by a minimum of $10. With this in mind, we asked ourselves:
“What can we do for $5?”
1. Increase the data caps by 15-25 GB per month
2. Offer “Free Time” between 12 am -6 am for larger downloads that won’t be counted towards the data caps.
3. Increase the speeds on our Home Basic and Standard packages.
4. Cut the overage fee in half from $1.50 to $0.75 per GB
Based on our numbers for 2014, this solution would decrease overages by 66 percent and more importantly decrease overage fees by 83 percent. The 11 GB average drops to 4 GB and the $16.50 overage fee drops to $3. That means the customer’s chances of going over their data cap drops by 66 percent and if they do happen to watch that one extra movie on Netflix the cost is cut in half.
The overage fees were only created to be a deterrent for abusing the system, not as a revenue generator. WaveDirect’s solution to the high overage fees is to give our customers a lot more for a lot less. We’d rather offer you 15-25 GB of extra data, more speed and some Free Time for $5 than make $16.50 per month on 11 GB of overages. Plus cutting the fees in half will save our customers money while still providing the needed deterrent for others not to abuse the system without slowing you down.