A Crazy Idea for Wireless Carriers

I’ve said it before and I’ll say it again: we deserve better from wireless carriers. I have been an extremely loyal AT&T customer since 2008 (when I got the iPhone 3G) and yesterday when Apple announced the iPhone 5s I decided to check my upgrade eligibility.  What did I find?  I found out that if I wanted to upgrade to the latest iPhone from my iPhone 5 prior to October 15 I would have to shell out full price (which starts at $649 for the 16GB model), after October 15 I would be eligible for slightly better pricing starting at $449 for the 16GB model.  However, it wouldn’t be until September 2014 that I’m eligible for upgrade pricing (which starts at $199 for the 16GB model).

This morning I called up AT&T and asked them for details on the “Next” program and if I could enter the program to see if I could upgrade that way.  No dice.  In order to be eligible to join the “Next” program you need to be eligible for an upgrade.  I’ve been thinking that the “system” in place at all wireless carriers is broken for some time now, but after today, I can say with absolute certainty that all wireless carriers are doing business wrong.

Let me explain.

In 2010 the average relationship length between a wireless carrier and a customer was 59 months.  As of 2012, a PricewaterhouseCoopers’ study said that the average cell phone customer now switches carriers as soon as his or her second two-year contract is up. According to the study, the average length of relationships between carriers and their under-contract customers fell to an all-time low of 48 months.  This is clearly bad news for wireless carriers, but I’m not surprised by it. Not one bit.

If wireless carriers want to reverse this trend then read my following recommendation very very carefully.

The Recommendation

It’s a simple recommendation, but one that I think will fix this trend.  Let your customers upgrade their smartphones once per year at the subsidized price without (and this part is very important) any additional fees or programs.  Just let your customers buy the latest iPhone, Galaxy, or whatever for the subsidized price.  You can keep the two year contract, that’s fine — you can keep your early termination fees and plans exactly how they are, just let us upgrade our smartphones at the subsidized pricing once per year — no questions asked.

In addition to that simple item, just provide outstanding service and customer support. That’s your job after all.  If we’re happy with our reception and the way you treat us then we won’t be going anywhere.

But Carriers Will Never Go For This…

Unfortunately, they probably won’t, but let me explain why they really should.

I sat down this morning and created a spreadsheet to comb through the numbers and there’s one number in particular that stood out at me.  However, before I jump into that, let me explain the methodology behind what I did.

First, I pulled the Wall Street Journal’s phone plan calculation chart and figured out how much it would cost currently for an individual to get a fairly standard plan from AT&T or Verizon.  The details of the plan were as follows: 2GB data, 1 line, up 450 minutes, and unlimited texts.

Next, I started to do the calculations for a traditional 2-year contract as we know it.  Since I have AT&T let’s focus on that carrier, according to the plans monthly cost ($90), every year that will cost me $1,080 for service alone, that ends up $2,160 in a traditional 2-year contract, or $2,360 if you factor in the cost of a subsidized iPhone (16GB model).  Ok, that makes sense.

Let’s assume that AT&T’s profit for that 2-year contract is the revenue we just mentioned minus the difference of the actual cost of the iPhone (which AT&T had to buy at full price: $650) and the subsidized price ($200).  The difference is $450.  So AT&T would have made a profit of $1,910 from you buying a subsidized iPhone and entering a 2-year contract.

Now here’s where it gets good.

Ok, now assume that AT&T let its customers upgrade their iPhones every year at subsidized pricing with no strings attached.  Basically following the same logic and math as before, they would be making $830 / year in profit, which equals $1,660 profit in a 2-year contract.  Obviously that’s not as much money as they were making with the old system, but that’s not how you need to look at it.

But again, based on that survey mentioned earlier customers aren’t sticking around after the contract is over anyway, so the profits are short-term and a ton of money has to be spent on acquiring new customers or trying to re-acquire old ones (ever notice how much wireless carriers advertise?).  But what if you converted those customers who are planning on leaving into loyal customers, wouldn’t that be much better?  Instead of losing out on $1,660 in two years (or more, depending on whether or not they come back to you and if they do how many years later), you will only be losing the $450 difference between the subsidized iPhone price and the actual iPhone price.  If you look at it that way, you will be making $1,210 more.  Plus, all of this assumes that the customer is actually going to upgrade their smartphone every year, they may not, but at least they’d have the option to do so if they wanted at a reasonable price. If the customer chooses to not upgrade one year, well then that’s even better for the carrier and more money in their pocket.

And for whatever it’s worth, if these carriers kept customers for their entire life and let them upgrade their smartphones at subsidized pricing every year at the current pricing, assuming it doesn’t change (which it definitely will at some point, most likely getting more expensive, but go with me) and assuming the average customer is with a carrier for 75 years they would make $62,250 from an individual with that pretty standard plan outlined above.

If one of the major U.S. carriers implemented this, I guarantee people would flock to them in droves.

Obviously I simplified things here, but the fundamental idea seems like it’s something that could work.  If it can’t, I’d love for someone at a wireless carrier to tell me and explain why in detail so I can relay the information back to you guys.

What do you think?  Is this something you would like to see wireless carriers implement?