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(originally published by Booz & Company)


Will Prepaid Service Be the Next Wireless Frontier?

• Small-business owners. Prepaid programs provide a simple method for small businesses to control employee spending on work-related cell phone use. In addition, prepaid plans help small businesses avoid wasting time with billing hassles, which is the No. 1 source of wireless customer dissatisfaction. More than 96 percent of all U.S. companies are small businesses.

• Transient travelers. A businessperson based in Atlanta who has a local plan and does not want to pay exorbitant roaming fees could purchase a prepaid calling plan and rent a handset upon arrival in New York. This would increase calling flexibility at a more reasonable cost. There are 700 million air travelers within North America annually.

Managing Costs, Maximizing Value
Identifying these customers is only the beginning. It’s also essential that carriers squeeze all the value they can from prepaid offerings by controlling costs and creating revenue with better services. Doing this requires continuous and innovative management, but it can pay off handsomely, frequently translating into increased earnings, as has been the case in Europe, where prepaid programs are prevalent. For example, Vodafone U.K. increased its prepaid customers from 54 percent of its subscriber base in 1999 to 68 percent in 2001. During that period, the carrier’s EBIDTA margins rose from 31 percent to 35 percent.

“The first step in seizing the undeveloped opportunities in the prepaid cellular market is to stop viewing its customers as undesirable.”
There are five key tactics that carriers should consider adopting to maximize the value from prepaid plans:

1. Control acquisition costs. Since the revenue collected from prepaid customers over the life of their relationship with a wireless company is generally lower than that of postpaid customers, it’s important for carriers to reduce expenses linked to prepaid programs. To do this, they should reduce handset subsidies, which are given to postpaid subscribers in exchange for a one-year contract, and instead offer low-cost refurbished phones. Carriers can also cut expenses by installing automated interactive voice response systems for call activation, and by making greater use of third-party distribution channels, such as supermarkets, convenience stories, vending machines, ATMs, and gas stations, to provide prepaid cards and phones. By decreasing the overall acquisition cost for prepaid customers by 50 percent, a carrier can recoup costs from prepaid customers within one month instead of about three months.

2. Offer value-added services. Prepaid plans in the U.S. have predominantly been basic voice offerings. In Europe, the introduction of higher margin services, such as mobile e-mail, and specialized short-message content, such as sports scores and financial data, has proven to be popular with prepaid customers, as much or more so than with traditional plan subscribers. However, carriers need to introduce these services gradually to avoid building additional costs into the system as they attempt to generate higher revenues.

3. Focus on customer retention. Prepaid customers have very little brand loyalty to their carriers — churn can be as high as 6 percent per month — because wireless companies prefer to avoid contact with these customers to minimize handling costs. But a few low-cost, high-touch strategies could result in greater prepaid customer retention. Among them: welcome calls, services for roamers, product promotion through text-based messages on the cell phone, handset renewal offers, newsletters, and mailings with discount vouchers.

4. Offer innovative pricing plans. Traditional prepaid pricing plans were so tightly structured that people who wanted more minutes had no incentive to increase usage. Carriers can earn extra revenue by such offerings as additional minutes per month at a lower rate, rewarding customers with reduced prices for subsequent months based on high usage in prior periods, lower rates for nighttime calls, and discounts when services are added to existing basic prepaid packages.

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