What Goes Into the Price of VOIP

This is reprinted with permission from the author, Russ Warner of Alianza. This was a nice piece of writing about VoIP that I wanted to share. It was in response to a WISP asking about $13 consumer VoIP white label service. During the discussion, I responded with the financial numbers for both Vonage and 8x8 (Packet8).

A VoIP provider generally has four costs to consider when establishing a price for its VoIP offering. The ongoing costs are:

1. Use of Technology (to provide services),
2. DID (phone number),
3. Minutes (termination), and
4. E911.

Minutes are the only variable cost in this equation. The other three are typically fixed costs (Technology Platform, DID, and E911).

E911 can generally be charged below-the-line and pass-through (like a tax); that way, E911 doesn't have to be considered in the published price (or toward determining your margin).

If you (WISP) offer unlimited calls to the residential customer, either you (WISP) or your White Label Provider is paying a variable cost each month for call termination that is dependent on the end customers' usage. White Label VoIP providers generally have a cost for outbound calls, while providing inbound and on-net calls for free. That's a question to ask.

When pricing is established, you (or the White Label Provider) have to take into account the usage and costs for your customer base and make an estimate (averaging) on your resulting cost. FCC data for 2003 estimates that Local (Intrastate) vs. Long Distance (Interstate) calls are roughly a 49/48 split (with 3% as toll-free or other).

I mention this because termination rates for Intrastate are generally higher (today) than for Interstate. This could change in the future. For the sake of cost calculation, I'll use a 50/50 weighted average cost for terminating calls.

Other market data suggests that the average residential customer makes approximately 300 minutes of outbound calls per month. Thus, the "variable" cost for minutes (call termination) is as follows:

• 300 - minute average outbound, off-net calls per month
• x $0.02 - sample rate per minute (combined Interstate/Intrastate rate)
• $6.00 - for minutes (call termination) / user / month

When you add $6 average variable cost for minutes to the price of the Technology + DID, you'll have your basic VoIP cost. Remember that minutes will fluctuate every month. Some months will be better than others. Either you (WISP) or your White Label Provider will be paying that cost.

Some VoIP providers offer a "metered" plan. The user essentially pays for their services and DID with a fixed monthly charge, but the user is on a pay-as-you-go pricing model for calls.

RATE CENTERS

When you establish a price for your VoIP offering, you can consider the following. There are many non-U.S. rate centers that are lower or similar to the U.S. in price. You could include calling areas in an "unlimited calling plan" without affecting the rate. Some examples of cities with rate centers with lower/equal rates are: Moscow, London, Singapore, Paris, Madrid, Frankfurt, Rome; countries: Australia, China, Brazil, Ireland, Denmark, and many more.

So you could offer a calling plan to your customer, for example, at $29.99/month, with unlimited calls to the U.S., Canada, plus UK, Italy, Spain, or others, without really affecting the internal cost.

BUSINESS VOIP

Business VoIP customers wanting PBX functionality can be charged a premium for those value-added services. Many providers charge a fixed rate per line per month as well.

On the low-end of the scale, one competitor/VoIP provider that sells direct to the end user has prices starting at $39 for PBX functionality and unlimited calls to US/Canada/similar rate centers. They have an activation fee of $39.99. If you sign a two-year contract and want a free phone, it's $59.99/month and unlimited calls, plus a $39.99 activation fee and $100 early cancellation fee.

Again, the variable cost is minutes (termination).

GOING RATE

I have done some limited research on Comcast, Time Warner Cable, Cox Communications and Vonage. These are the top 4 digital voice providers in the U.S. (Total of 12 million subscribers.)

Of these four, three are double or triple-players (i.e., offer broadband and TV and/or VoIP). Vonage is the only single player (VoIP only). The cable companies have a new customer acquisition cost about 10x less than Vonage, because they sell VoIP to their current cable/broadband subscribers. There are economies of scale for you as WISPs selling a new service to your current customers.

SINGLE PLAY

Many single-play VoIP providers such as Vonage offer a $24.99/month residential package that includes basic services, a phone number and unlimited calling minutes (US/Canada and some other countries). This implies inbound and outbound calls are included. E911 is available.

Many of them have one-time activation fees and cancellation fees (see below). In lieu of a contract, some require a service termination fee (see below). All offer a 30-day money-back guarantee.

Examples:

• Vonage is $24.99 for unlimited and $14.99 for 500 minutes ($29 activation; $39 cancellation)
• Qwest is $29.99/month for residential VoIP.
• AT&T Call Vantage is $24.99/month for unlimited ($29 activation; no cancellation)
• Voip.com is $21.95 for unlimited. ($29 activation; $39 cancellation)
• Verizon $24.95 for unlimited and $19.95 for 500 minutes ($0 activation online; $39 cancellation)
• Packet8 is $24.99 for unlimited ($29 activation; $59 cancellation)

DOUBLE/TRIPLE PLAY

The three double/triple-play providers mentioned (Comcast, Time Warner Cable and Cox). Comcast has a $39.95 residential package that includes basic telephony services, a phone number and unlimited calling minutes (US/Canada); first 6-months, you pay $29.99. Time Warner Cable is $49.99 and Cox Communications is $49.95/month. In all cases, E911 is available. None of them have activation fees. Time Warner and Comcast have a termination fee. All offer a 30-day money-back guarantee.

Comcast and Time Warner Cable offer package of voice, data, and cable TV for $99/month. After the first year, Comcast's regular prices apply.

If you already have Time Warner cable or bb services, VoIP is $29.95. [the end]

It is a great look at the US nationwide pricing in 1Q08.

I still have an agent agreement with MyPhoneCompany.com who sells at about the same rate as Vonage, but do not have the overhead or the advertising expense.

Also, there is a whole chapter in my book, SELLECOM, about VOIP.