Cox tests tiers: two speeds, two prices

Aug 5, 2002  •  Post A Comment

Cox Communications is currently testing a tiered broadband pricing model in its Connecticut market and hopes the results will shed light on when and how to use new rates to lure a new set of customers into broadband.
The cable operator offers two levels of products in its Las Vegas market-with its flagship high-speed service at $34.95 and a lower-speed 256 Kbps service for $26.95-and started a technical trial of tiered pricing late last year in New England. In May, Cox rolled out a market trial to test consumer interest in the Connecticut market, which counts about 100,000 customers out of 120,000 to 140,000 homes passed.
In that market, Cox now offers two tiers of broadband service-its standard product with speeds capable of up to 3 Mbps and a symmetrical service that operates at 128 Kbps upstream and downstream for $23.95. That service is designed to be competitive with dial-up service, said David Pugliese, VP, product marketing and management.
He expects the test will run through August, but the company will likely hold off on marketing efforts until it assesses the results and determines such factors as who opted for which type of service, who upgraded, who downgraded, who disconnected and whether the cheaper service cannibalized the higher-priced one.
“By offering tiered, do you face any cannibalization of current customers? That’s one of the key learnings of this trial. Going into the trial that is the lead question we need to have answered before we deploy this product,” he said.
The risk is that the lower-priced service may siphon off customers who already have selected the higher-priced one. However, the data indicates that slightly fewer than 100 customers in the trial have downgraded, a number that is not meaningful at this point, he said. Cox also wants to discern whether the customers who opt for the lower-priced service will need more handholding and require more time with technical support and customer service.
The operator launched print and radio ads to introduce the service to customers. Since that marketing effort began a number of customers who saw the ads for the lower-priced service chose to actually purchase the more expensive one, a sign that bodes well for Cox.
Down the road, he plans to offer free high-speed weekends about once a month, in much the same way that HBO and Showtime offer free weekends, so customers with the slower service can sample the faster service. “My hypothesis is once they see the difference and how much better it is they will stay with high-speed,” he said.
Still, Mr. Pugliese doesn’t think the tiered pricing model will be offered on a wide scale in the short term because demand is still robust for the traditional high-speed service. However, as penetration deepens, a lower-priced product will be essential to reach the laggards and the late adopters. “Those will be more diehard resisters, so a lower price point may be required to bring them in,” he said. Wide-scale deployment is more likely in 2003 or 2004.
A tiered pricing model makes absolute sense, but the question is when, said Bruce Leichtman, president and principal analyst with Leichtman Research Group. His research indicates that at a $30-per-month price point compared with $45, twice as many consumers will be willing to pay for the service. “Lowering the price absolutely expands the market,” he said. “The only risk is cannibalization.”
One way to avoid loss of customers is to position a lower-priced service as an upgrade to dial up rather than a substitute for higher-priced high-speed service, Mr. Leichtman said.
Time Warner has looked into tiered pricing but has not yet made a decision to offer such a model. An important factor to keep in mind is that tiered pricing may be based on usage or volume of bandwidth rather than based simply on speed, a spokesperson said.