Zen Internet’s Andrew Sayle explains how UK broadband ISPs set pricing

The Connectivity Portfolio Manager of UK broadband ISP Zen Internet, Andrew Sayle, has published a new editorial that gives consumers a unique insight into how modern Internet Service Providers set the price you pay for your package. It also touches on how much of an impact that decision can have on the service or support quality you receive.

Regular readers of ISPreview will know of how we often make the point that price ISPs pay at wholesale for the line you’re on (e.g. from Openreach, CityFibre or others) is not the same as the price consumers pay at retail. This is because ISPs have to add all sorts of extra costs on top (e.g. 20% VAT, profit margins, network services / features / capacity etc.), which is an oversimplification.

Andrew delves into the decision making for all this and highlights how the price you pay also needs to reflect other areas, such as marketing; the bundled router and postage (if applicable); traffic peering / transit deals; the fee paid to the comparison site on every sale (if applicable); support teams (inc. staff pensions etc.); payment systems; balancing for future cost rises; the cost of adding Ofcom’s latest piece of regulatory wonder; balancing costs for customers who don’t pay their bills and a myriad of other things.

The piece also delves into the contentious area of heavily discounted first year (or first term) price promotion. Andrew makes the point that such discounts “often [won’t] cover the ISP’s costs at all” and that it’s more based on a “bet” you’ll stay past the contracted end date (many people do – especially with only c.15% switching every year).

“That bet is the entire reason the industry ended up with the loyalty penalty, retention discounts and mid-contract price rises, and no, I’m not defending that structure. You’re right to find it annoying. It’s just more useful to see it as the consequence of the discount you were offered at the start than as some grand act of villainy,” explained Andrew.

The reality is that a lot of consumers often voice a desire for things like good support, service quality and fixed price contracts, but then many of those same people still go on to buy on price anyway, fuelling a collective race to the bottom. Andrew’s piece does a really good job of expression all of the conflicts and challenges in how an ISP decides on what to charge customers.

Andrew Sayle said:

“Your price wasn’t worked out from what it costs us. It was worked out from what you’d click on.

The costs came after. We take the number the market will bear, then spend weeks arguing about what we can afford to give up underneath it. The network, the support desk, the intro offer that loses money in the hope you’ll stay. All squeezed to fit a number that was decided before anyone opened the spreadsheet. Which, for the record, has too many tabs.

Most people picture it the other way round: wholesale line, plus a bit, done. Anyone charging more is having a laugh. It’s a reasonable theory. It’s just not how any of us actually do it.

So I’ve written it all down. What’s really in the bill, why the cheapest deal and the fixed deal are rarely the same deal, and why great service is both the thing that keeps you, and the thing whose price tag might just push you away.”

We highly recommend reading Andrew’s blog on this, particularly if you’re not already familiar with how things like this work behind the scenes, as it’s a fairly short, easy read that fits a lot of subtle detail into just a few paragraphs.