Tuesday, November 9, 2010
The Huge Draw of Postpaid Plans:The Price of Phones
Q:Free or cheaper phones, but what is the real cost?
A: A huge draw for postpaid cellular service is that most providers give away phones when you sign a new cell phone contract. There are certain models made available for these promotions, and they bring in the subscribers. Even if a new customer wants a different phone, a subsidy is applied to that purchase. That is, the service provider picks up some of the tab for your new phone. Thus the reason for credit checks.
Beyond the attractive marketing opportunities this presents, there's an overarching reason why carriers subsidize new cell phone purchases. Simply, in postpaid service, you're tied down to a contract, the norm being two years in length.
Q: So how, exactly, does this work?
A: Here's the idea behind subsidizing phones. For whatever reason, cell phones are rather expensive. This might be because of high mark-ups somewhere along the production line, or it might be that the phones actually cost that much to produce.
In any event, it's tough to get people to drop serious money on a cell phone. Not only do you have to pay for service on top of it, but they're especially fragile.
Think of your TV service. It's a similar situation in that you have to buy a TV, and then buy the cable service. However, TVs are less volatile than cell phones. They stay in one plays, rather than being trucked around in your pocket or purse. Because cell phones are mobile, they're far more apt to break. So this either means paying more for insurance, or paying for another phone down the road. Neither is very attractive -- especially considering how we've made cell phones an essential instrument in our daily lives.
Somewhere along the line, cell phone companies figured out that the best way to entice customers was to offer a discount on phones. But if they're taking a hit in that department, they have to make up for it somewhere else. Hence, the two-year contract.
Over the two-year term, the company figures to make back its investment in the subscriber's phone. This is also why they employ early termination fees. When you cancel before your contract is up, you're repaying the company for the subsidy they provided you.
But do you want to be locked into a plan just because the phone appears to be free or cheaper?
Is it really cheaper to be part of a postpaid plan, especially if the service is not the best? In the big picture postpaid plans are significantly more expensive and cell phones are a necessity in today's world.
What to do?