I found myself explaining the new Home::1 tariff yesterday, in the pub, as you do, and handling the question "Do ISPs pay by the gigabyte then?"
It is tricky - in some ways we do - in that the more people download the more we pay, overall, but it is more complex. We pay based on usage levels, and it is the highest levels in the day that matter. The challenge we have, and why we are "reassuringly expensive" is that we try and ensure we buy enough capacity to not be a bottleneck, even at those peak times. It would be easy to buy a lot less, and slow people down a tad in the evenings, but we don't.
This leads on to the fact that the new tariff has 25GB as the starting level monthly quota, and why we picked that that figure.
Interestingly, existing customers are moving to the new tariff, even where that means paying slightly more than before. This suggests we have the level right. What is odd is the few comments on web pages that 25GB is measly and clearly not enough.
It is, sadly, not like selling Mars bars! We cannot simply look at what gigabytes cost us, add a margin, and sell them. We have to try and pitch the tariff at a level, and to the right audience of customer types, that results in usage that causes a cost that is less than we collect in revenue. There are times of day which are not "peak" usage, and in those times extra usage is, in effect, free for us - but if everyone started using bandwidth at those times they would become peak and cost us a lot of money. The cost of bandwidth is a lot compared to what people pay. If we had only one customer, the cost of providing their bandwidth would be thousands a month - so it is a balancing act.
To that end we picked 25GB, not because 25GB "costs us £X" where X is less than the £25 we charge for the service, but because that usage level is adequate for the typical home user, and the typical home user will have a usage pattern such that the average cost to us for such users is less than the £25 we charge.
Now, 25GB is quite a lot, really. We actually looked at home users download rates, and concluded that the average home user was downloading around 14GB a month even when they have an allowance of 100GB or more of off peak download. The existing units based tariff, at the entry level of 2 units, does allow 100GB off peak (and even more in middle of night). So the 14GB is not because of a limit on usage, it is just naturally what home users are using. Looking only at those that buy just 2 units the average user downloads 10GB a month. So, 25GB is a lot and allows quite a bit of room for changes in usage patterns as more people do occasionally download and stream video.
Of course, a lot of new customers have no idea what they use, so they look at 25GB and ask "is that a lot?", or even "is that enough?".
Given the slightly negative comments that we have seen, I wonder if we have picked 25GB based on a scientific assessment of what is sensible, and we should perhaps have picked something more on an emotional level, and what people think looks like a lot. If we had picked 50GB, for example, it may seem more acceptable. Ultimately we don't expect it to make a big difference to the costs. As we see now, even giving people 100GB the average user will use what they use. Of course this logic does not quite extend to the idea of an "unlimited" tariff, as that starts to attract a different sort of customer who will download solidly rather than using what they need, just because they can. With bigger ISPs that is viable, because they have few enough people "exploiting" the unlimited usage that the average is sensible. In effect the lighter users all pay for that high usage of a few.
So, changing to 50GB entry level and higher usage of 150GB or 250GB instead, and, of course, making sure the existing customers benefit from the change too.