Tag: Strategic pricing

Unlimited Plans: A Race To The Bottom?

Christian

In the last few years, many cell phone carriers have released “unlimited” plans that actually have limits. Most of these plans are sufficient for the average person. Problems show up for a minority of cell phone users that are especially heavy data users.

Many people read my posts explaining the limits carriers place on their “unlimited” plans and react with a version of:

Ok, fine Chris. Sure these plans aren’t technically unlimited. But you’re being pedantic as hell. These plans are as-good-as-unlimited for 98% of people.

My pushback on “unlimited” plans isn’t about protecting heavy data users. In the long run, I’m worried that “unlimited” plans are part of a trend that will be harmful to a much larger group of people: light and moderate data users.

Huh?

This has happened before

For more than a decade, I’ve been following the portion of the web hosting industry that caters to personal websites and small-business websites. When I first started watching the industry, almost every web host offered a fixed number of gigabytes of bandwidth each month. Customers that wanted more bandwidth had to pay more. At some point, a few web hosts began offering “unlimited” bandwidth plans.

Of course, no web hosts actually offered unlimited bandwidth. Hosts put restrictions in their terms of service agreements that made it possible to shut down websites that hogged server resources. If Google had tried to host its infrastructure on a $10 per month “unlimited” plan, it would have been shut down instantly.1

Even though most websites are tiny and have modest resource demands, people running tiny websites tend to like the idea of having an unlimited plan. Since the internet has way more tiny websites than medium-sized websites, web hosts could allow some unprofitable, medium-sized clients to stick around. The hosting bills for tiny websites essentially subsidized some more popular websites.

Over a few years, it became clear that offering “unlimited” plans was a winning business strategy. Gradually, unlimited plans became the industry standard. Fixed-bandwidth plans faded away.2

Back to cellular

Fixed-data cell phone plans are fading in the U.S. market. Take a look at the websites of any of the Big 3 networks. Which plans do you see? Unlimited plans get the attention. Fixed-data plans still exist, but they’re buried.

It didn’t used to be this way. The move towards unlimited plans has been rapid and will probably continue until unlimited plans dominate the market. Unless regulatory bodies step in, I see only two ways this can play out in the long run. Both scenarios seem bad:

  • Unlimited plans without many restrictions become standard. Light data users essentially subsidize heavy data users.
  • “Unlimited” plans with significant restrictions become standard. We get a race to the bottom.

Racing to the bottom

When fixed-data plans dominated the market, customers were aware of the limitations they were likely to run into. Hell, plans were their limitations. A 5GB plan might have been named “The 5GB Plan”.

As unlimited plans have risen, limitations have been hidden from customers and tucked away in the fine print of legal documents. Plan names turned meaningless: “T-Mobile Magenta” and “Verizon Above Unlimited.”

Carriers place limits on their “unlimited” plans so they can compete on costs. Have you noticed the policies below on the rise?

  • Video throttling
  • Hotspot data throttled to slower speeds than regular data
  • Monthly hotspot allotments that have no relation to overall data allotments
  • Data transfer that’s restricted to sluggish speeds after subscribers use a certain amount of data

For network operators, it’s not important whether a gigabyte of data is used streaming video, loading web pages, or running a hotspot.3 All these policies have the same purpose: reducing subscribers’ data use.

Low-priority data is another common limitation thrown on plans. Subscribers with low-priority data will experience normal speeds when a network isn’t congested, but their speeds will turn sluggish when things get busy.

Limits aren’t the problem

I’m not broadly against limits. I’m against limits that confuse consumers. I’m against limits that aren’t explained clearly and prominently.

Unfortunately, unlimited plans attract the kinds of limits I oppose. At some level, it makes sense, at least from a business perspective. If a carrier downplays how serious the limits are on one of its plans, the plan will be more appealing to consumers.

Carriers throttling heavy data users to 128Kbps don’t make candid disclosures. Imagine what that would look like:

After 35GB per month of data use, download speeds will decrease to frustratingly slow speeds (around 128Kbps). You probably won’t want to use the internet at these speeds unless you really need to. But if you have to load a boarding pass or an email after you’re out of regular data, you should be able to with a bit of patience!

No. We get vague disclosures like:

Data speeds reduce after 35GB but data is unlimited.4

Plans with low-priority data will have fine print mentioning reduced speeds during congestion, but details will be sparse. Customers trying to figure out how common congestion is, where congestion tends to occur, or how much speeds are slowed aren’t going to find the information they’re looking for.

Hell, it’s not just regular consumers that get confused and misled. My favorite tech review site can’t sort out prioritization policies. Here’s a bit from Wirecutter:

A T-Mobile spokesperson confirmed that policy, saying that although postpaid and prepaid T-Mobile service have the same priority, Metro by T-Mobile and other resellers ‘may notice slower speeds in times of network congestion’…However, AT&T and Verizon told us that they don’t impose any such prioritization.

Perhaps the scariest part of the excerpt is not that Wirecutter is wrong, but that people speaking for AT&T and Verizon were wrong about their own companies’ policies.

Where will we end up?

If nothing changes, we’ll continue to see the low-cost side of the market (a) throw more limitations on plans and (b) bury limitations deeper. In my view, the problem isn’t evil carriers. It’s bad incentives. Maybe the FCC or the NAD (National Advertising Division) will jump in and change carriers’ incentives. I’m not too optimistic, though.

Accountant calculating

Xfinity Mobile’s Pricing Strategy

Christian

Comcast’s cellular brand, Xfinity Mobile, appears awfully well priced. Somehow, Xfinity Mobile offers service over Verizon’s extensive network without the usual price tag. You can check Xfinity Mobile’s coverage at your location with the carrier’s coverage tool.

Unlimited minutes and texts are included for free in all of Xfinity Mobile’s plans. Subscribers just pay for data, and rates for data are reasonable. For $45 per month, a subscriber can get unlimited data. Alternatively, subscribers can purchase a set amount of data and share it among up to five lines:

  • 1GB data – $12 per month
  • 3GB data – $30 per month
  • 10GB data – $60 per month

A family could get five lines of service with 10GB of shared data, unlimited minutes, and unlimited texts for a base price of only $12 per line.1 Purchasing a comparable family plan from Verizon would be far more expensive. Even other mobile virtual network operators (MVNOs) that run over Verizon’s network charge far more for similar plans. Why is Xfinity Mobile so cheap?

(Added 5/17/2020: In the time since this post was published, Xfinity Mobile changed the 1GB option from $12 to $15 per month.)

Lock-in with other Xfinity services

Only customers with active Xfinity internet service are eligible to sign up for Xfinity Mobile. Some people who would have used internet service providers other than Xfinity may now choose Xfinity internet so that they can sign up for Xfinity Mobile. Similarly, potential fees incentivize Xfinity Mobile customers not to cancel other Xfinity services:2

$20 per line monthly charge applies if at least one of the following post-pay subscriptions are not maintained on the account: Xfinity TV, Internet or Voice service.

Competitors threaten Comcast. Like Comcast, Verizon’s Fios offers bundled TV, internet, and home phone service. Emerging technologies like 5G fixed wireless may create viable alternatives to conventional cable companies. By bundling several services together, Xfinity may make it more difficult for consumers to switch to competitors’ services.

Favorable MVNO terms

Xfinity Mobile is relatively new, but it already has a huge number of subscribers.3 While the agreements between MVNOs like Xfinity Mobile and host operators like Verizon are generally private, my impression is that MVNOs with large subscriber bases often receive substantially better rates than MVNOs with small subscriber bases. Xfinity Mobile may, in part, be able to offer low prices because it gets unusually good rates on access to Verizon’s network.

Future prices

While Xfinity Mobile’s service is well-priced today, it’s not guaranteed to stay that way forever. We’ve already seen one revamp in Xfinity Mobile’s price structure.

Other explanations

I haven’t seen Comcast executives explicitly explain their rationale for launching a mobile service, so all I can do is speculate. If you have other thoughts about Xfinity Mobile’s pricing strategy, please leave a comment!

Avoid Mismatched Phone Plans

Christian

There are probably millions of people in the U.S. that could save a lot of money by switching to a different plan offered by their existing cell phone carrier. For example, plenty of people pay for expensive plans with unlimited data, even though they only use a few gigabytes of data each month.

Recently, I angered a lot of people when I said Google Fi is generally too expensive for me to recommend the service. Several commenters argued I was wrong. Some of the commenters were polite. Others called me an idiot. Commenters often mentioned how much they used to pay for service from a major carrier and how much they saved by switching to Google Fi.

In many cases, commenters appeared to have purchased the wrong plans when they used major carriers. They were paying for data they didn’t need. Since Google Fi has a pay-for-what-you-use pricing structure, Fi subscribers basically cannot be on a plan that is mismatched with their data use.

Unsurprisingly, a person who barely uses data can probably get a better rate on a Google Fi plan than she can get on a high-data plan from Verizon. But Verizon also offers plans with small data allotments. We should make apples-to-apples comparisons when we can.

Examples

Below, I share excerpts from previous comments and my follow-up thoughts.

My wireless bill with Fi is $100 cheaper than it was with two phones on Verizon’s cheapest plan…a plan that includes more than 1gb per a phone is costly and unnecessary.
$100 cheaper!? I don’t think this commenter could have been on Verizon’s cheapest plan. Today, two lines of Verizon prepaid with 6 GB of data on each line (way more than the commenter desires) would cost only a bit more than $60 per month.

Google Fi unlimited calls and texts only costs $20 a month and when you add that to their pay-for-what-you-use data your monthly cost could be around mine at roughly $28/month, as I barely use any data…Now compare that with Verizon’s bare minimum unlimited plan starting at $70 before taxes and fees…Fi allows us to escape the tyranny of major cellular corporations and their overpriced plan structures.1
No! It’s inappropriate to compare the cost of service with barely any data use to the cost of an unlimited data plan.

Our monthly bill for all 3 lines with Verizon was around $180. It was reduced to less than $70 after switching to FI for the last 5 months.
Under $70 for three lines is a pretty good deal! No need to switch away from Fi, but let’s consider what comparable service would cost today with Verizon. With three Fi lines and a total cost under $70 per month, total data use is probably under 2GB per month.2 A postpaid, Verizon plan with 3 lines and 2GB of shared data is about $100 per month right now. Prepaid options could come out under $100 per month.

My bill with Verizon was always $105 a month for two gigs of Internet.
One of Verizon’s prepaid options right now offers three times that amount of data for about a third of the price!

Carriers create confusion

People who are on mismatched plans aren’t idiots. Many carriers like it went customers pay extra money for unnecessary amounts of data. Instead of alerting subscribers who are paying for too much data, carriers often take steps to encourage customers to over-purchase data. I call the cell phone industry a confusopoly for a reason.

Finding plans that fit

As mentioned earlier, one way to ensure that you’re not paying for data you don’t need is to choose a carrier with a pay-for-what-you-use model (e.g., Ting or Google Fi). That said, I think most people can find better prices with carriers that use conventional pricing structures.

If you know how much data you typically use (or have records of data use you can look back on), you can probably figure out how much data you’d like your cell phone plan to offer. If you’re unsure about your data use, I suggest starting small. Choose a plan with the smallest amount of data that you think might be adequate. Experiment with that plan for a few months. Add more data if the initial data allotment you started with turns out to be insufficient.

Did Google Fi Shoot Itself In The Foot?

Christian 39 Comments

Google Fi has a lot going for it: amazing international roaming options, fancy network-switching technology, and a simple pricing structure. Despite all Fi’s great aspects, I don’t usually recommend it. For most users, it’s just too expensive. Google Fi typically charges $10 per gigabyte of data. A lot of other carriers offer plans with far lower rates for data.

All Fi subscribers have roughly the same plan with the same pricing structure.1 There aren’t ten different plans with different names and policies. This is in sharp contrast with Verizon. Looking at just unlimited plans, Verizon has several options:

  1. Start Unlimited
  2. Play More Unlimited
  3. Do More Unlimited
  4. Get More Unlimited

In fact, Verizon actually has a fifth unlimited plan it offers as a prepaid option. Each unlimited plan is a bit different. Some of the plans have more limits than others—inviting critics to joke about how Verizon doesn’t understand the meaning of the word “unlimited.”

While it feels silly, there are a handful of reasons why it makes business sense for Verizon to have several unlimited plans. Today, I’ll only touch on one of those reasons: when a carrier has multiple plans, it’s easier to introduce new prices and policies without immediately affecting existing customers. We just saw Verizon do this. A month ago, Verizon was offering three postpaid, unlimited plans. They were different from today’s plans:

  • GoUnlimited
  • BeyondUnlimited
  • AboveUnlimited

When Verizon introduces new plans, it can cease offering old plans to new customers while offering existing customers the same service on legacy plans. Since there are several plans that all have different policies, it’s difficult for people to make simple, apples-to-apples comparisons between legacy plans and plans available to new customers.

Back to Fi. Google Fi has been charging almost everyone $10 per gigabyte for a long time.2 Years ago, that was a decent price for data. Today it’s not. Data costs have gone down in most of the industry.

I don’t have any inside knowledge about Fi, but I’m suspicious Fi’s simple pricing structure makes it hard for the company to change its prices. If Fi wanted to offer new customers data for $5 per gigabyte, existing Google Fi subscribers would want that deal too. If existing subscribers had to continue paying $10 per gigabyte, they’d get angry. If Fi reduced prices for existing subscribers, Fi’s revenue would plummet.

Added after publication: The idea I share in this post probably doesn’t explain why Fi charges so much for data (or at least, it is probably an incomplete explanation). There are a lot of other plausible explanations. E.g., Fi’s agreements with network operators may not lead to Fi getting good rates on data.

Added even later: When I said I don’t usually recommend Google Fi, I didn’t mean to imply that Fi’s prices are uniquely awful or that no one should use Fi. Rather, I don’t typically recommend Google Fi since most consumers can find comparable service at a lower price (see carriers I recommend).

Start Small

Christian

With recurring expenses, I often advise people to start small and upgrade later if necessary. The rationale behind the advice is easy to illustrate with internet service.

Home internet is often priced based on the max speeds the service provider will deliver. Usually, max speeds are described as some number of megabits per second (Mbps). A cable company’s price structure might look something like this:

  • 40 Mbps – $30 per month
  • 150 Mbps – $45 per month
  • 300 Mbps – $60 per month
  • 600 Mbps – $75 per month
  • 1,000 Mbps – $100 per month

The problem

Most people want internet that feels fast, but not many people have a clear sense of how many Mbps it takes for a connection to feel fast. People who are uncertain often end up choosing a speed that falls in the middle of the options available. If that speed is sufficient, they generally stick with it. If the speed turns out to be too slow, they upgrade. With this approach, people won’t get clear feedback if they purchase faster speeds than necessary. People often spend years paying extra for high speeds they don’t benefit from.

In my opinion, over-purchasing happens more often than necessary because service providers encourage it. For example, one of the Xfinity internet options available to me right now involves a max speed of 60 Mbps. Xfinity explains that the speed is “good for up to 5 devices at the same time.” This is silly. 60Mbps might only support 5 devices if they’re all streaming ultra-HD video at the same time. For more realistic situations, a 60 Mbps connection can support far more than 5 devices. Xfinity knows this, but Xfinity has an incentive to encourage customers to purchase more expensive service than necessary.

I expect Xfinity’s cost structure is effective for the company since it allows them to engage in a weak form of price discrimination. In most markets, different people are willing to pay different amounts for the same product or service. If business owners can find a way to charge more money to the people who are willing to pay more, their businesses will be more profitable. Something like this occurs with internet service. People with tight budgets tend to start with cheaper, slower options. People with more money tend to purchase higher speeds than they need and often overpay for service without recognizing it.

The solution

Overspending is often easy to avoid. When services allow easy upgrading without any extra fees (as is often the case with internet), I advise people to start with the cheapest option that they think might be adequate. If you start with a low-speed tier for internet services, there’s a good chance you’ll find it satisfactory. If not, you can upgrade to the next speed tier.

The same solution works in other industries. Not sure how many gigabytes of data you need on your cell phone plan? Start with a small amount. If you hit your monthly allotment, add more data.

Not sure whether cheap, prepaid service will perform as well as postpaid service? Try prepaid service for a month. If you like it, stick with it. If not, switch over to postpaid service.

Starting small is a good idea in situations where services with recurring bills are easy to upgrade. While companies often penalize people who downgrade services, upgrading services is often easier. Companies are generally happy to have their customers pay more each month. That said, starting small isn’t always a good idea. For example, an internet service provider may offer discounted, introductory rates that customers are ineligible for when upgrading.

Buy Your Own Router And Modem

Christian

Earlier this week, I signed up for Comcast’s Xfinity internet at a new apartment. If a subscriber doesn’t bring his or her own modem and router, Xfinity will rent a device for $13 per month. As far as I can tell, the majority of subscribers opt to rent. Renting is a terrible deal.

I purchased a modem and a router in 2017 for a total of about $70. While I don’t mind having a separate modem and router, there are plenty of options for simple devices that combine a router and a modem into a single unit. Amazon’s best-selling combination devices can be seen here. At the time of writing, several high-quality devices are available for between $80 and $130.

A $13 per month rental fee works out to $156 per year. A router can easily be used for 3 years, possibly much longer.

The table below shows the overall cost of renting a $13 per month router/modem for different lengths of time. I assume that rental fees will not increase over time. The assumption is generous. In the last decade, Comcast’s rental costs have risen by about 4X from $3 per month to $13 per month. The table also shows how much a subscriber could save by buying a high-end, $150 router/modem instead of renting.

Years usedRental costSavings by purchasingRental cost vs. purchase cost
1$156$64%
2$312$162108%
3$468$318212%
4$624$474316%
5$780$630420%
6$936$786524%
7$1,092$942628%

If you only use a $150 device for a single year, renting and buying are about equally cost-effective. In the off chance you use your service for less than a year, renting may make financial sense. That said, most Xfinity plans come with a one-year commitment. I doubt many customers subscribe for short enough periods to justify renting. If you keep your service for a few years or more, you can save a ton of money by buying your own modem and router.

Renting a modem/router may appeal to people since it’s simple. If you rent a device from Xfinity, you may not worry about compatibility and performance as much as you would when buying your own modem/router.

If the technical aspects of buying a modem or router concern you, here’s my advice for keeping things simple:

  • Visit Amazon’s page listing its best-selling modem/router combination devices.
  • Limit yourself to devices that are well-reviewed.
  • Find a listing explicitly states that the device is (a) compatible with the service you will use (e.g., Comcast Xfinity) and (b) able to support service at the speed you want.1

Some people will struggle when deciding which device to purchase. A lot of consumers aren’t sure about the speeds they’ll want. They might find a cheap device that is probably good enough but wonder whether they should spend some extra cash to get a device they’re confident is good enough. Remember that even if you spend more than you need to on a router/modem, you’re probably still getting a way better deal than you would with a rented device.