Prepaid cellphone plans – cheaper but still not as popular
Really interesting article in the New York Times a few weeks ago that highlights the fact that many of the prepaid plans offered by major carriers have a lower total cost of ownership compared to the standard two-year contracts. Prepaid plans differ from these standard contract plans because buyers are typically required to pay full price for the cellphone but then pay a much lower monthly rate without the required two-year contract.
The Times used two current iPhone plans (AT&T’s standard two-year contract versus Virgin Mobile’s prepaid plan) to highlight the differences:
The iPhone with a two-year contract on AT&T, for example, costs $200 for the handset and then upward of $90 a month for the plan; over two years, including the cost of the phone, customers pay at least $2,360. With a prepaid plan on Virgin Mobile, which is owned by Sprint, the iPhone costs $650 for the handset, and then $30 a month, including unlimited data (the type of data plan that people are happier with, according to J.D. Power). Over two years, that would cost about $1,370.
By my math, that’s a nearly thousand-dollar difference over two years. So the obvious question to ask is why? With prepaid plans accounting for only 23 percent of all wireless contracts today, why don’t more consumers switch to prepaid plans?
Tero Kuittinen, a vice president of Alekstra, a company that helps customers manage their cellphone bills thinks the reasons for this lack of take-up has more to do with human psychology:
"Right now, consumers don't do the math, and they have a lot of resistance to paying $500 to $600 upfront, and they'd rather pay $100 upfront and then overspend," he said. "That psychology has worked for hundreds of years, and it's still working."
Others think it may have more to do with how prepaid plans are marketed and sold.
"They deliberately don't market their prepaid plans," said Jan Dawson, an Ovum analyst. "They want you on postpaid plans that deliver higher revenue per user, on contracts that are going to lock you in."
Sprint, for instance, hasn't begun marketing the iPhone on Virgin Mobile's prepaid plans, even though that offering was introduced in June, (though it says it does plan to eventually).
Mr. Dawson added that smaller carriers that offer prepaid plans, like Leap Wireless or MetroPCS, have tiny marketing budgets compared to the big carriers like AT&T and Verizon Wireless, so their cheaper phone plans simply aren't as well known.
My take differs slightly. I think that most consumers are vaguely aware of prepaid plans, but are not willing to take on the risk of switching plans or service providers. And as long as prepaid plans are passively marketed, then the current 23 percent market penetration number is not going to change significantly.
From a service provider’s point of view, the passive marketing is part of a strategy of building ‘fences’ around their core two-year contract-pricing model. The discount plans are structured so that most consumers are unwilling to take the risks implicit in these types of plans; but still accessible to that segment of consumers who are most price sensitive. Exactly what pricing fences are supposed to accomplish!