Limiting Upgrade Availability

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?

8 thoughts on “Limiting Upgrade Availability

  1. The upgrade cycle is extremely important to most cell phone carriers. Unfortunately, I am one of those people who upgrade to the new iPhone whenever they release a new one. In doing this, I am extended my contract for 2 years every time. This can translate to huge revenue gains for Verizon, AT&T, Sprint and T-Mobile. On the contrary, if other carriers have a shorter upgrade cycle, customers might be more likely to switch carriers.

  2. I believe lengthening the time between cell phone upgrades would negatively affect Verizon. Personally, I am always aware of when I am eligible for an upgrade and often times feel as though 20 months is too long. This change would not give Verizon a competitive advantage, but instead cause other cell phone providers to look more attractive to consumers due to sooner upgrade eligibility.

  3. I agree with the previous comments. This change in the wireless plan seems simply as a financial lifebuoy for Verizon. Perhaps Verizon is trying to target a different group — late adapters, who are less likely to upgrade phones. What do you think?

  4. I have been a loyal customer with Verizon for years and their customer support has been unreal. There is no way that extending their upgrade time 4 more months would influence a decision to switch carriers for me. If I wanted to buy a new cell phone product through Verizon but had to wait an additional 4 months to purchase with an upgrade, it would most likely be a better investment for me long term. Companies that have there products out longer are usually able to fix any glitches in their product. Thus, through exercising some “buyer-patience” by waiting 4 months to upgrade, I could potentially have a better product.

  5. For me personally, an extra 4 months to upgrade phones is a deal breaker. Over the course of 24 months, a lot can happen. What if you lose your phone or break it? Even if you pay for phone insurance each month, you will still get charged over $100 to replace a lost or broken phone. Many people would prefer to upgrade their phone rather than spending extra money just to replace the same phone. This is one of the reasons why frequent upgrades are so important.

  6. The increase in time to get a phone upgrade would definitely influence my decision. Verizon’s decision of doing so will be beneficial and will also have negative affects, I feel that although customer retention is important, getting new customers is as important. If they increase the time limit for an upgrade to 24 months most people will think about whether or not they want to get bound into that contract. What if a new phone comes out sooner than that? I would not want to wait so long. The only advantage that Verizon will get from developing this new management technique is customer retention. I do not think many new customers will be attracted to this 24 month bound contract till you can get an upgrade unless they implement lower price contracts compared to other companies.

  7. I agree with most of the commentors. The length of time between upgrades is of utmost importance. Why would you want to give up those 4 months when other carriers are still offering upgrades every 20 months? The opportunity cost is much greater for the 24 month cycle than for the 20 month cycle. Also, the decision is not a good one on Verizon’s part. There is a good possibility they could lose a number of customers by adopting this policy. All in all, I think it should be avoided.

  8. I also agree with many of the previous comments on this post. Lengthening the time between upgrades could lose customers and prevent people from switching to Verizon. Even though it is just four months, those four months could be a timeframe for a lot to happen; especially with a phone as fragile as an iPhone. AT&T just recently started this financing option if you are not eligible for an upgrade when you want that newest iPhone. You still pay the “non-contract” price, but it is divided up over 18 months and is just added on to your bill. This option makes upgrading seem more manageable than just forking out $700 out of your pocket.

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