Prepaid Ain't Nothing but a Payment Method

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In the US wireless marketplace, carriers covet postpaid customers above all, as do their investors. Carriers have focused their businesses on a subscription model comprising subsidized handsets, locked phones and multi-year contracts. They use this approach to limit churn, keep ARPU high, and… well, because they’ve always done it.

Prepaid started in the US as a way to serve credit-challenged customers. A postpaid subscriber needs to have good credit, so the carrier has some assurance that he will pay through the contract term. Many prospects didn’t qualify, so the carriers turned to prepaid as a way to provide service without the risk of default.

And so it is today, fifteen years after the first prepaid customers were brought on line in the US. Carriers consider prepaid a marginal service with an unappealing financial profile targeted at an unimportant niche of customers.

In Europe it’s not this way. And several US MVNOs–Tracfone, Virgin and Boost in particular, have developed prepaid businesses that are more broadly targeted. There’s much more that can be done to mainstream prepaid in the US–if we look at prepaid differently.

Prepaid doesn’t mean you aren’t connected to your customers. It does mean that you are not connected to customers by default, in the way a postpaid provider is by providing a monthly bill (and, of course, the chains of that 2-year contract). Prepaid customers don’t have to share anything with you–they can buy their phones and recharge cards at the retailer and remain anonymous–but with the right kind of programs and incentives, you can have as robust a customer relationship. Perhaps a better one, since it’s based on the quality of the product and the customer’s choice rather than contracts and penalties.

Prepaid is a more transparent product. There is little or no subsidy with a prepaid phone, so the costs are more transparent to the subscriber. While prepaid providers, perhaps in imitation of their postpaid competitors, have gotten too creative and confusing with rate plans (per minute, daily fee plus per minute, minutes that expire, etc.), the base service concept–pay for what you use–is highly transparent and in tune with the way people consume lots of products these days.

Prepaid lacks many of the unpleasant aspects of postpaid. The simpler structure of prepaid, especially its lack of contracts and penalties, is a virtue today more than ever. (The Kindle pricing model is a prepaid subscription. Another widespread product, Skype, works on a prepaid model as well.)

Challenging the assumption that postpaid is better is important now because we are on the cusp of a revolution in wireless, always-on connected gadgets. Portable modems, GPS devices, and the aforementioned Kindle are but a sample of what we’ll see in the next few years. I, for one, hope the customer models for these devices show some of the innovation the devices themselves offer.

(Photo: one of those cool new mobile devices, the Novatel MiFi personal hot spot)

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