Prepaid Phones: Are They Worth the Savings?

Customer examining prepaid phonesPrepaid phones were around before smartphones arrived on the cellphone scene. Yet consumers haven’t been enchanted by pay as you go plans, and more regularly apply for lengthy contracts. In the United States, in fact, only about a quarter of wireless customers opt for prepaid phones. Yet prepaid phones have the potential to offer considerable savings to consumers. They can save consumers more money in the long run, they offer more flexibility to consumers, and they increase competition in the marketplace (which is nearly always good for consumers). Yet are the savings worth it?

Prepaid Phones Cost More at First, but Save More in the Long Run

As is usually the case, you get what you pay for, and sometimes less. In the mobile marketplace, it seems that consumers pay more for their phones than the actual value of the gadgets. Not at first, though. Major (contract) phone carriers are in the practice of subsidizing the purchase of phones. As a result, consumers are in the habit of paying less up front for their phones. Consumers typically pay a starting fee resembling the manufacturing cost of the device, and often even less than that. But over time, consumers end up paying far more than the cost of their phones.

Prepaid phones, on the other hand, are nearly always less costly over the long run. It’s true that devices cost more at first. Smartphones purchased from prepaid carriers aren’t subsidized, so consumers pay more up front for the phones. Yet consumers aren’t locked in to contracts, and the fees for prepaid services are generally lower than their contract counterparts. Minor (prepaid) carriers are in the business of providing less expensive offerings to consumers, so consumers can potentially save hundreds of dollars over the lifetime of their ownership of a prepaid phone.

Yet prepaid carriers operate in a specific market niche. Their target customers are those of lower incomes. Because of this, they don’t usually offer the fancier, more expensive phones that many consumers desire. This is one reason that higher-income customers tend toward contract carriers. Recently, minor carriers such as Cricket Wireless and Virgin Mobile began offering the latest generation of Apple’s iPhones, but this is a new trend that may or may not continue. Consumers of prepaid phones simply can’t afford such devices or aren’t in the habit of paying the upfront expense of owning more expensive devices.

As the number of contract subscribers declines in the US, more consumers may turn to prepaid phones in order to satisfy their mobile needs. It will be interesting to see how smaller carriers will be able to meet the expectations of consumers used to more feature-filled phones.

Prepaid Phones Offer Savings Through Flexibility

Consumers of prepaid phones may not have the variety of choice in devices that customers of major carriers have, but they usually find more flexibility with smaller carriers. And savings can come to consumers due to this flexibility. An iPhone purchased for use on a minor carrier may be used on another network. This is not always the case, but when it is, the consumer wins by being able to switch to a more competitive service. Prepaid phone customer Ron Schenone relates his experience:

I have been using prepaid phone services from AT&T followed by Straight Talk for five years. Six months ago, I switched to a T-Mobile plan that was being offered from Walmart. The prepaid plan costs $30 + tax a month and provides 100 minutes of talk time, unlimited text messages, and 4G speeds for the first 5 GB of data usage. I have an Android 2.3 Samsung phone that I purchased online from Walmart for $189 and I am now on auto-pay with T-Mobile.

Should Ron find his experience with T-Mobile lacking, he would only have to find another carrier where his phone could operate, and purchase a month of service. No contract required. In my own prepaid travels I’ve encountered many smartphone users who have been able to switch between using their devices on either Cricket Wireless or MetroPCS networks, depending on which service offered either the better price or the better service at the time. As mentioned before, it’s not always possible to jump carriers. As more consumers turn to prepaid phones, however, consumers will demand that more devices offer this type of flexibility. Prepaid carriers that do not work to offer this type of consumer choice will almost certainly fail.

Supporting Prepaid Phones Helps Consumers

Consumers have often perceived prepaid services to be substandard to their contract counterparts, but Consumer Reports and other consumer watchdog outlets show otherwise. The fact is, prepaid voice and data services operate on the same networks as the services offered for contract. Sometimes minor (prepaid) carriers are even reported to offer better customer service than major (postpaid) carriers. This may be due to some minor carriers being more focused on customer service in order to differentiate themselves from major carriers.

In my own dealings with a minor carrier, I’ve experienced both good and bad customer service. The first time I contacted Cricket Wireless in order to set up my prepaid phone, I was transferred numerous times through a labyrinth of operators before the issue I was experiencing was resolved. The next time I had an issue with the device, however, I was extremely pleased with the service I was given. Though it was fairly clear that Cricket Wireless outsources its customer service to a region outside of the US — at least in part — the customer service was satisfactory enough for me to continue using its services.

Competition nearly always benefits the consumer. The existence of prepaid phone carriers in the marketplace establishes a more competitive market. Currently, major players like AT&T and Verizon adjust their offerings to compete with each other more than with smaller carriers. This is the case due to prepaid carriers being relatively invisible in the marketplace. As more customers turn away from postpaid carriers and begin looking at prepaid phones, major carriers will be forced to adjust their offerings to be more competitive with smaller carriers.

In the end, it is up to the consumer to choose: Do you want to save more? Do you want more flexibility? Do you want to increase competition? As more consumers turn to prepaid phones, postpaid carriers will be forced to reconfigure their own offerings in order to appear attractive to consumers again.

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