Cbeyond: Cheapest Transitions to Stickiest

by Dave Michels

Around 2000, Cbeyond shook up the Denver carrier market with their Beyond Voice Bundle. Aimed squarely at small business – BeyondVoice utilized a single T1 to provide a Voice and Data bundle for about $500/mo. They did have a technical advantage, but that wasn’t the key to their initial success. Cbeyond was and is first and foremost a sales and marketing company – and their competitors aren’t. They are an aggressive organization and they changed the way bandwidth is sold. They are a very impressive company and just about every competitor (McCloud, ICG/Level3, Qwest, XO, etc.) are imitating them, but always on the old playbook. Cbeyond initially won with a strong value/price proposition – but this is a cutthroat industry and someone will always be cheaper. So Cbeyond has changed their strategy to sticky services making cancellation a painful undertaking. In a business known for price drops – Cbeyond hasn’t dropped their prices in years now.

Prior to Cbeyond, selling circuits was a surprisingly complex business. It seems so simple – but there are enough complications regarding CPE equipment, router/firewall issues, long distance rates, toll free services, PBX interfaces, hunt groups vs. T1s vs PRIs, channelized requirements, DNS updates, and so on that the typical network sales representative required years of experience to be successful. These old dogs were expensive, and other than translating customer requirements, the bulk of their duties were filling out forms and then chasing the process since no one read the forms. Circuit provisioning is one of the dark ugly holes of telecom – and a major factor of why the industry has such a bureaucratic reputation.

Cbeyond figured out that college grads are much cheaper and hungrier sales reps – but to use them effectively they would need to create some powerful marketing tools to make up for their lack of experience. The Beyond Voice 1 package did it. It was very simple. One T1 connected to a Cisco IAD that was included in the price. The IAD dynamically split the bandwidth between voice and Internet services and offered a single RJ45 for the data and a choice of analog RJ11s or a T1/PRI interface for the phone system. The package had it all, equipment, long distance, 800 number, Internet access, email, conference calling, and more in a simple single offering with few options. Liberal Arts college grads could be trained in less than a week and set free to knock on doors – they had to sell 5 T1s a month or lose their job. It was the classical “numbers game” sales approach. Since telecom costs typically drop – all they had to do was find a customer/prospect off their contract which typically meant circuits more than 3 years old – which meant strong savings. Cbeyond typically replaced a voice carrier and initially typically became the first non-dial-up ISP at a competitive rate. The initial offering was $500 for five lines, up to 1.5 Mbps Internet, email, web hosting, and 1500 minutes of in-or-out long distance.

In addition to their channel strategy, rumor has it that at one time, Cbeyond had over 80 direct reps working the Denver market. It was hard to avoid them. There was a Denver Tech Center building with a “No Soliciting” sign on the door that someone posted a “That Means You Cbeyond” note below which summed it up. As much as we hated these dumb kids out there hustling circuits (they often got things wrong out of ignorance not understanding a phone system required PRI or something), they sold circuits and lots of them. Cbeyond eventually added Beyond Voice 2 and Beyond Voice 3 (3 T1s aggregated together as a single circuit). They also added SIPConnect which is one of the most comprehensive SIP offerings on the market.

Their technology is good and they have expanded into many new markets. They have a number of benefits to their solution – but oddly price is no longer one of them. In fact they seem quite stubborn about it and although have broadened their offerings to include things like cellular phones – they still have a $500/mo minimum requirement for any new customer. They shook things up initially offering a great price – but alas someone is always cheaper and customers are not particularly loyal in the SMB bandwidth market. Cbeyond needed a new strategy to retain their customers and once again they changed the rules. Their prices are reasonable, but they don’t even try to position themselves as the low cost provider any more. They changed the game. Now they are offering a broad range of services that few if any competitors can match. This forces their competitors to position their services against a few of Cbeyond’s services – leaving migration gaps that customers are unwilling to take on for a minor savings.

They have done this with both their Single offerings as well as their bundled offerings. Take for example their SIPConnect service. They are selling SIP trunks for $30/mo – two to three times the market price – but it isn’t so simple. Included in their $500/mo SIPConnect service is Internet service complete with SIP/voice prioritization. They also offer a fax solution which causes problems for most of their SIP competitors. They bundle in some Long distance, an 800 number, and fax to email. Compare this against one ISP, plus another SIP provider, plus some prioritization hardware, plus a POTs carrier for fax, plus, an LD carrier and it becomes clear how they win.

But the bigger strategy is to bundle together things that aren’t normally bundled. In addition to their core offerings around voice and Internet bandwidth, they now offer cellular phone service, wireless Internet service, desktop backups, whale mail, hosted MS Exchange complete with BES for their cellular service, mobile GPS/mapping service with their cellular services, web hosting, conferencing calling, web collaboration services, VPN services, SIP trunks, and more. All of these services are at reasonable pricing, but clearly the one throat to choke value prop is the key for the initial sale.

But the real strategy is customer stickiness. I think this was probably discovered by accident –just the initial Beyond Voice 1 which combined voice and data services was more sticky than traditional data or voice services – because to change vendors meant that both IT and Telecom had to agree. And the IT department wasn’t about to change their security/firewall rules and update DNS information so the voice department could save a few cents on specific calls. But that is just two services, add in cellular contracts (all of which come with a new term commitment with each new phone), Blackberry services and hosted Exchange and now the cost to the customer to change carriers becomes pretty major. There is nothing illegal or even immoral about this approach – it is a fine value approach and the customer can leave anytime they want assuming their contract is up. Each service is effectively optional and the customer would not sign up unless there was a reasonable value proposition. But the secret is each service – say cellular might be compared against alternatives, but the exit strategy of quitting all of Cbeyond on a specific date is rarely evaluated up-front. As long as Cbeyond remains reasonably competitive (price and service), I can’t see how a customer can ever afford to fire them.

Cbeyond is transitioning an industry from cutthroat pricing to horizontal value while their competitors are still trying to catch up on dynamic bandwidth. Meanwhile Cbeyond has kept their sales model simple and still relies on fresh graduates. I just met a sales VP in Denver that I will guess has a lot more pairs of white socks than black socks in his dresser. I’ve learned over the years not to underestimate Cbeyond – they get execution and I think this strategy is right on. Other carriers, particularly cellular carriers, don’t seem at all concerned about churn. Carriers tend to only concern themselves with new customers – and somewhat unable to make the connection that new customers eventually become old customers only to be a new customer somewhere else. If Cbeyond manages to keep their aggressive sales model combined with a strong retention model they will likely become the primary vendor in each of their geographic markets (which is also expanding very quickly).