Handset subsidies may be counter-productive

I was intrigued by the data M:Metrics provided for our recent Stat Spot: according to a survey of some 33,000 US mobile phone users, those who received their handset free of charge were the least satisfied with their ‘purchase’. Is this merely a reflection of a society made ungrateful by the excesses of consumerism or does it hint at a fundamental flaw in the subsidy system which has driven handset upgrade cycles for so many years.

The graph below illustrates the percentage of users selecting the 3 highest satisfaction ratings on a 10 point scale across different price levels.

The trend is clear: the more users pay for their handsets, the greater their level of satisfaction. There may be several reasons behind this: the more expensive their handset, the more features it is likely to have and therefore will be perceived as being a better product. Also, customers who pay a higher price have ‘pre-qualified’ themselves to like the handset because market dynamics dictates they wouldn’t have paid that price unless they were particularly keen to get that model.

However, as readers of this newsletters will known, the number of features on a handset is no guarantee it will be appreciated by customers. In fact, handsets with a single purpose – such as RIM’s email devices – emerged as the most popular in our previous M:Metrics Stat Spot on handset brands. Ease of use and fulfilling a user’s main objective as efficiently as possible is a better guarantee of satisfaction than feature loading.

Willingness to pay may be a better indicator. Customers vote with their cash and the fact they have parted with a larger amount of money suggests they already appreciate a particular model. It is also likely these users will have researched their purchase in more detail and arrived at the store with a specific handset in mind; in contrast, most free handsets are chosen from a ‘menu’ of options provided by the operator.

I believe the psychology behind these purchasing decisions also has an impact on long-term revenue generation. Those receiving their handset free are unlikely to demonstrate an interest in discovering new features whereas someone who has paid a higher price will be more inclined explore the range of services beyond voice and text. The result is the operator may be paying more subsidy to give handsets away free of charge with less chance the features will be used.

Operators are not blind to this possibility. T-Mobile was one of the first to announce plans to review its handset subsidy policies and that strategy looks set to step-up a gear in the UK market later this year. According to this Mobile Today interview with Jim Hyde, UK managing director for the German carrier, he plans to look closely at how they can deliver value through better tariffs and customer service rather than steep, upfront discounts.

Hyde told Mobile Today: “Everyone’s been doing it one way for a long time. They’ve been giving away free phones and fighting it out for another scrap of market share and we’d like to see if we can change that model here in the UK.” He comes from T-Mobile’s US operations, which have enjoyed consistently strong growth over the last couple of years.

He continues: “I personally believe that if we can put a programme in place that allows the customer to save money on their mobile bill over 18 months, that’s more valuable than an extra £50 discount on a handset; but that’s just me. The customer may have a completely different vote. I guess we’ll find out and have to adjust accordingly. Whether it’s a tariff adjustment or a handset price adjustment, I’m not quite sure.”

You can read the full interview here.

To-date most operators have focused their reviews of handset subsidies around the issues of subscriber acquisition cost (SAC) and churn. Given that is when the subsidy cost is recorded in the business process, it is the logical place to start. However, I think there is a strong argument for examining how the initial purchase price and subsequent satisfaction level impacts revenue from future services and willingess to try new features.

It may be the money spent on handset subsidy is better invested in enhancing the operator’s retail presence to include demonstrations of new services, staff training and a more attractive store environment. It could also be re-directed into providing free trials of new data services, allowing users to experiment more freely when new features launch on the network.

With thanks to M:Metrics for their data.

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  1. 1
    Anders Borg

    There are other things the money could be spent on:

    * Securing that all revenue-generating functions and services are fully accessible by the users, including educating the customers.

    * Find a viable and economical solution for all the phones users return because they think they are broken.

    One thing lack of subsidy could cause though, for the broader market that only makes voice calls and sends SMSs, is that they won’t upgrade their phones. Maybe not so bad for the operators but potentially very bad for the manufacturers.

  2. 2
    Marek Pawlowski

    Interesting observations Anders. Virgin, an MVNO here in the UK, has started to offer its contract customers a reduction in their monthly tariff after the first year if they chose not to upgrade their handset.

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