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(originally published by Booz & Company)


Will Prepaid Service Be the Next Wireless Frontier?

Profits and growth are slowing for the U.S. wireless industry, but new customers for prepaid services could be the key to a revival.

U.S. wireless companies are facing difficult times. Although market penetration in the U.S. reached 50 percent of the nation’s population this year, double what it was just four years ago, growth is now slowing considerably. In fact, Booz Allen Hamilton and industry analysts estimate that at best the market will top off at about 60 percent in 2005. This means new profitable customers, let alone high value ones, are becoming extremely hard to find.

“The critical challenge carriers face today is how to capture an incremental customer more profitably without cannibalizing existing subscriber revenue.”
To snatch up remaining customers, wireless carriers have resorted to such cutthroat tactics as giving away minutes and offering steep discounts on handsets. As a result, the average monthly bill for cell phone service has dropped about 8 percent since 2000, to $61 from $66. This implies that carriers are not only slashing prices for new customers, but also for existing subscribers — individuals willing to pay more for wireless service.

The critical challenge carriers face today is how to capture an incremental customer more profitably without cannibalizing existing subscriber revenue. To accomplish this, wireless companies have to explore unconventional ways to compete for subscriber dollars. One of the more intriguing and potentially lucrative target markets is prepaid wireless, a large untapped segment that could drive the next wave of customer acquisition without compromising sales growth. With this service, people pay up front for mobile usage by, for instance, purchasing a phone card or remitting a monthly fee in advance.

Because this market sector is typically viewed as populated by only non–credit worthy and risky customers, few U.S. wireless companies have paid much attention to developing prepaid wireless strategies. However, close examination of the economics of this segment shows that it can be an avenue for wireless companies to improve profitability and avoid the pain of jeopardizing revenue in order to increase subscriber volume.

“Potential users of prepaid wireless service are largely untapped segments that could drive the next wave of customer acquisition without compromising sales growth.”
A Fresh Perspective
The first step in seizing the undeveloped opportunities in the prepaid cellular market is to stop viewing its customers as undesirable. Carriers can target a much larger, as well as a more diverse and attractive, set of customers, for which the prepaid plan structure is inherently appealing. They include:

• Occasional users. Most likely, these customers already have a cell phone but are unhappy about being locked in to a contract that requires them to pay for upward of 300 minutes per month, which is usually much more time than they need. In fact, an estimated 67 percent of U.S. subscribers use fewer than 180 minutes per month.

• Teenagers and young adults. Since most teens and young adults don’t have the budget for a postpaid plan, many of them have to piggyback their parents’ plans as additional users. From a perspective of customer loyalty and lifetime value, targeting individuals between 16 and 24 for prepaid programs could be lucrative for wireless companies, because many will switch over to a postpaid account later in life. Young people also tend to like to experiment with new technology, so they might purchase higher-margin value-added services like e-mail, location-based promotions (such as guides that list the nearest restaurants), and Web browsing. This demographic constitutes 14 percent of the overall population and is growing 70 percent faster than other segments.

• Hispanics. Because members of Hispanics households tend to share infrastructure (houses, cars, telephones, etc.), they often prefer prepaid phone cards to avoid keeping track of direct-dial charges for each person. And, compared with other cultures, Hispanic cultures are characterized by a preference for cash-based financial transactions.

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