For those who use cell phones, it is a well-known fact that when you first join a wireless service provider, you can buy a phone at a very low price or even for free. But once you have used the company for a while, if you try to upgrade your phone to a newer model, you are charged a hefty price for it. Although some companies offer a discount on phones if you are willing to extend your contract, the discount is much smaller compared with what new customers get. Below is a comparison of the prices a new vs. existing T-mobile customer (i.e., me) would receive on the same phone models:
Phone | w/o Extension | w/ 2-year extension | New customers
Nokia 6103 | $149.99 | $49.99 | $0
Motorola W490 | $159.99 | $109.99 | $49.99
Dash | $399.99 | $267.99 | $149.99
One can envision the reason for charging a higher price to existing customers when, in old days, people were locked in to a company by their phone numbers. If you wanted to switch to a different wireless provider, you would lose your number. That was a significant switching cost for a consumer. Therefore, it took “sweeter” deals to lure people to switch. Now with the portability of phone numbers, such a switching barrier is no longer present. By still offering much lower prices to new signups, cell phone companies are essentially encouraging consumers to switch providers frequently rather than staying with one firm.
While firms do have a need to make a profit and should not give everything away, under the new business environment, it makes much more sense to reverse the pricing strategy and offer existing customers a deeper discount instead. From a customer relationship management perspective, it is much more economical and efficient to keep your existing customers rather than trying to chase after new ones. When a consumer’s existing contract is about to expire with a wireless provider, the provider should offer the consumer an incentive to happily stay rather than going back onto the market and starting to look for better deals from another provider.
In sum, wireless companies should adapt their existing pricing strategy to the new market environment and aim to build a more profitable business around a core group of loyal customers rather than “hoppers”.