A New Pricing Paradigm for Hosted VoIP?

By Doug Allen

Hosted VoIP services are one of telecoms hottest spaces right now, as myriad carriers and providers scratch to dig out market share with ever-more feature-rich and flexible solutions. But that flexibility has rarely extended to the way these services are marketed and priced; most hosted VoIP providers follow the same general, complicated formula for setting their retail prices. And in a confusing technology segment that often leaves customers baffled when trying to evaluate, much less understand, the pros and cons of a hosted VoIP implementation vs. an in-house PBX or IP PBX deployment, a little clarity would go a long way to helping customers and channel partners decide which option to choose.

Its no secret that hosted VoIP pricing plans can drive customers to drink for lack of a simple, streamlined way to tally the true costs of such a system. Traditionally, hosted VoIP pricing has been based on the number of users, or seats, with usage charges bundled in with the seat license to cover capacity costs. This results in overbilling for underutilized line capacity; most companies have their share of power phone users, but many lines often dont need the same kind of outbound or long-distance calling privileges.  To illustrate this, think of all the voice traffic on the CEOs line compared to rarely used extensions in the company cafeteria or shipping warehouse.

By comparison, a few ITSPs such as Nuvio Corp. and Broadvox LLC   have adopted price plans that mimic a customer PBX. By separating the lines used (equivalent to number of users) from the usage or capacity required, these providers have hit upon a new pricing model that allows customers to make a far simpler, apples-to-apples comparison between VoIP calling plans, hosted or in-house. And thats good news for the SMB space these providers are targeting, as well as larger businesses which may also benefit from more flexible pricing plans for their smaller locations.

Take Broadvox for example. Essentially, the ITSP breaks out its pricing by separating line usage fees from the licenses required for user lines. Its flagship solution, GO!Hosted, costs just $5 per month per extension and includes all available features. Call capacity (usage) is purchased separately and can be added as needed; overall capacity doesnt necessarily have to increase as more users are brought on-net, though, due to the services ability to better share and allocate bandwidth resources.

Similarly, Nuvio tries to model an in-house PBX pricing structure by charging solely for the number of extensions and lines needed; any additional capacity required is a separate charge. Customers can add extensions and lines as needed to the providers NuvioFlex service, without necessarily increasing capacity.

If I have a plan for 25 extensions and I add two employees but my overall call capacity isnt really going to increase then I only pay an additional $14 (Nuvios fee for two extensions) per month, said Diane Myers, directing analyst at Infonetics Research. With more traditional plans, adding two additional seats would cost me roughly $45-50 extra per month. Thats a significant difference if I dont need additional minutes of use or call capacity (i.e., lines). Then that extra amount Im paying for is really just about features.

The chief benefit of this approach, aside from lowering costs, is simplicity, both for the customer and the channel partner. When you look at current pricing models it can be confusing and overwhelming for smaller businesses. Having simplified pricing schemes is something the entire industry should embrace. The new pricing models are still based on number of users/extensions, which is similar to capacity purchased on a PBX, and one could argue extensions and user seats for the traditional hosted model are analogous. The difference with these models is that they bring the call capacity (number of lines) into the equation. This part makes it more similar to a PBX service where you are purchasing extension capacity and a PRI or SIP trunk for call capacity.

Paul Burns, president of consultancy Neovise LLC, agreed that separating capacity is the way to go since customers dont need to purchase dedicated lines for every employee. An IP PBX whether physical or virtual provides some additional resource sharing.

One key to adopting split lines/usage pricing is the type of PBX used. Nuvio developed its own PBX in-house instead of being locked into a third-party vendor PBX based on the old pricing paradigm, in order to maximize its capacity to offer more flexible pricing plans. And thats a key advantage.

I think NuvioFlex just makes sense because most providers will not be able to adopt it, said Jason Talley, Nuvios CEO. Softswitch manufacturers have forced them into a per seat licensing model that just cant compete economically with what we are offering today. To us, every seat should be full-featured and be able to use Nuvios vast feature set. That is how a premises-based system works and it just makes sense. Resellers of softswitch companies just cant make that happen on a competitive basis and still preserve their margins and/or current business models.

Talley added that what the provider may lose in revenues from lower pricing per account, it makes up in numbers of customers added, and the company has seen a corresponding uptick in sales. With a greater customer sign-on rate, Nuvio can still grow revenues overall despite lower margins.

But the real benefit to hosted VoIP channel partners with these new pricing plans lies in its simplicity; these plans are easier to pitch to customers because they lend themselves to straight-up comparisons of PBX models. Instead of a huge educational process about what per seat pricing is, and why they need it, [customers] can simply use their existing [PBX] configurations as a template, Talley explained. Our new services are truly virtual PBXs, meaning you can replicate a premises-based systems lines and extension format. So, for our customers, there is no more analysis needed about how hosted services compare.

The result? Customers are more willing to buy solutions based on these pricing models, and are doing so more quickly and confidently. When customers are asked to pay for a dedicated line for each employee, they feel like they are leaving something on the table, said analyst Burns, even if it is less expensive than their traditional PBX solution. When you take that requirement away and give them an easy compare, it is much easier to make a purchase decision.

Talley reported a sharp drop in Nuvios average sale close time; moreover, he said the companys agents have reported their sales cycle is easier and requires much less time spent educating the customer.

For ITSPs and their channel partners with broad communications portfolios, there is the always the potential for upselling related services, but the primary value of these new pricing schemes lies in simply winning more deals overall. It is much better for companies like Nuvio to win five smaller deals even without future upsell than it is to win two slightly larger deals, said Burns. Customers want a great value and that value is more clear with this approach.

So are these split line/usage plans an interesting anomaly, or a nascent trend? Its early days, but such models could have legs. I dont see [these pricing plans] as a trend or a marketing spin, said Myers. I think a few providers are responding to a need to have more flexible and easy-to-understand pricing models and they have the ability to adapt. I suspect others will watch and learn from them.

Neovises Burns said a trend is developing one that will grow as the early movers establish the validity of such models. I think the customer value and the related demand is strong enough that competitors will need to follow suit. There may even be some additional innovation around pricing models to come. With a virtual solution, the flexibility is sure there.