Saving money by negotiating your cellular contract

When a market is growing, competing firms can all make money as long as their customer acquisition cost is lower than the lifetime value of each customer. The bigger the gap the more money they make and the faster they can invest money back into the marketing cycle. However, when the market saturates then the only way you get a new customer is if that customer leaves a competitor. So you want to lock your customers into your service while also making it extremely attractive for other customers to join yours. This is exactly what’s happening in our mobile market, where handset penetration is now over 100% of the market (yes, plenty people have 2 phones).

For a while it’s been interesting to watch how this played out, even more so now that my mobile contract has come up for renewal and I’ve had a bit of time to consider my options and do some maths. The results have shown some pretty major cost savings that may easily apply to you:

The situation: I’ve been a loyal customer of a big operator for a while (let’s call them “Yellow”). As someone who is mobile and likes tech I’ve used an iPhone4 for 2 years, which I’ve run with an external battery cover to give me more ‘on the road’ time and also save the internal battery. I pay on contract, which runs 24 months together with my wife’s phone and a tablet costs me around R2.3K per month, or R55K over 2 years, which suddenly seems like a lot. I can upgrade to new phones and tablets and a new 24-month contract immediately. I’ll even save a bit of money because device prices seem to have come down a bit (the call charges haven’t – at least not on Yellow). So, by rolling to a new contract I can get 3 shiny new devices and my bill will drop to about R48K for the 24-month period, i.e. R2K per month. Not how saving R300 per month suddenly added up to R7K over 2 years.

Here’s the catch: our phones work fine and there’s really no need for an upgrade. I don’t particularly have any use for near field communication, eyeball tracking or Siri. Thanks to the battery cover I use, my iPhone is effectively brand new. I know from a friend who dropped their iPhone and got it fixed, that a new battery, home button and screen will cost about R2K from a reputable agent. In other words, I don’t need a new device, and thus I don’t really need to upgrade or renew my contract, and thus is starts to become very important to see what I’m actually paying for my calls. What’s very interesting is that Yellow doesn’t offer packages that allow me to ‘bring my own device’. So, they immediately become unappealing and I’ve started to look elsewhere.

In the meantime, a smaller operator (let’s call them ‘Black’) has new leadership who seem to have nothing to lose and have introduced some very innovative pricing: a flat rate of R0.99 per minute. The simplicity appeals to me (despite the maths we sometimes show in this column!). If I look at what I actually pay on my contract with Yellow per call then it’s nearly twice as much as Black will offer me, and even more than this ‘out of bundle’. If my wife is on the same network then most of the calls between each other (on Black) will be free. Most importantly, Black will offer you a contract with a device included or one where you can bring your own device. Since I really don’t need a new device, suddenly we’re talking business.

Now Yellow have figured out that I’m considering switching so they’ve offered me R3K of cash credits if I stay, but they still don’t offer a ‘bring your own device’ option. Even with this retention incentive, moving to Black is still R6K cheaper (over 2 years) if a get brand-new shiny devices on both networks – the ‘apples for apples’ comparison.

However if I bring my own device then suddenly things are very different. I can go from a 24-month contract on Yellow that costs me R55K to a month-by-month contract on Black that costs me only R821 (for exactly the same use as current – although Black offer more data and free SMS/MMS with each minute, Yellow don’t). Over a 24-month period this is a saving of R35K on an original price of R55K. That’s a truckload.

If my phone breaks, I’ll fix it or upgrade to a 24-month contract at the time, but for now the logical, obvious rational thing to do is to drop Yellow and switch to Black and save myself a lot of money. Number porting will take a day and I can do it myself. I know from friends that it works fine.

If you think about it in terms of Yellow and Black, my switch will remove R55K of revenue (less device charges) from Yellow and will add only R20K of revenue to Black. The saving is all mine. What if 100 people did this? Or 1 Million people? How would Yellow like to lose R55 Billion of revenue over 2 years? How much would Black like to gain R20 Billion of revenue over the same period.

The question to ask yourself is whether you really need a new phone too? Why? What if your whole household or even your whole business took this approach? How much would you save over 24 months? Over 48 months? Over the rest of your life? Blacks’ call rates of R0.99 are a compelling value proposition, but you’ll have to see for yourself. :)