Think back to when the iPhone 5 was introduced to the public. The expectations of the new device from Apple were at an all time high, and the public’s anticipation to buy the phone was unbelievable. Sales margins are expected to be higher during periods where new products are introduced, but an aspect that can be overlooked is whether the company will have to provide subsidies for the purchase of the new phone, or if the purchase is made without an available upgrade and at its full retail price.
If a customer has an upgrade available, they may be more likely to purchase a new phone because the company will provide a subsidy that will lower the price. Without an upgrade the product would be purchased at retail price, and the company earns more.
The service contract is a signed commitment to remain loyal to the provider for 24 months. This requires that the services on the device, including Internet, text messaging, and phone calls will be paid for throughout the two year time period. An average length of time before a phone upgrade is available is 20 months. This differs from the signed 24-month contract, and requires that the company provide subsidies more often than the customers renew contracts.
When an account has an available upgrade, the service provider offers a subsidy, deduction of the retail price, towards the purchase of a new phone. If the customer is upgrading to a smart phone on an account that did not previously require data usage, the service provider will generate revenue on the sale. This is because the cost of a data plan to the customer is greater than the cost of the subsidy to the service provider. However, with the increase in smart phones in past years, these sales margins are declining because the customer does not require an increased data usage plan. While the sales of newly released products increase sales margins, the company often loses out on the subsidy provided to purchase a new phone.
Verizon Wireless has released plans to extend the length of time before upgrade availability to 24 months. The intent is to lengthen the amount of time between when the company is required to offer upgrade subsidies. The 24-month period would align with the length of time between contracts and would allow for the company to earn revenues on contracts and acquire subsidy expenses simultaneously. If this change is made, the structure of Verizon’s project management would change. The company would likely change its strategy from the introduction of new products to a focus on customer retention.
While this plan would make financial sense for Verizon Wireless, it is different from their competitors. Would lengthening the time between phone upgrades influence your decision to enter into a new contract with Verizon? How important is the availability of an upgrade to you when considering purchasing a new phone? How could this change in Verizon’s contracting process be debilitating? Would this change give Verizon a competitive advantage?