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The cost of a BYO mobile phone versus a contract mobile phone October 28, 2011

Posted by Peter Earl in Consumer behaviour, Telecommunications economics, Uncategorized.
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Many users of mobile phones are prone to speak of having ‘got a free phone with my plan’ but the fact that the service provider companies advertise phones as ‘$0 upfront’ rather than ‘free’ is an invitation to canny consumers to try to find out the prices that are really being charged. This market is in a constant state of flux, so never assume that even recent figures are accurate: do you own sums.  This piece is about the sums to do, illustrated with what are now partly historical data: it offers an analysis of what Vodafone was offering its Australian customers on 26–7 October, 2011. However, on 28 October 2011, while this piece was being completed, Vodafone changed some of its plans, so do not presume what is said in the present tense still applies.

Vodafone don’t sell outright many of the phones they offer with the postpaid plans, but here are the ones they do sell as prepaid phones, locked to the Vodafone service as well as offering them on contracts:

Nexus S RRP $299, online $269
Nokia X3-02 RRP $129, online $117 ($199 unlocked at Dick Smith Electronics)
Nokia C2-01 RRP $79, online $71 ($99 in warm silver or $129 in black, unlocked, at Dick Smith Electronics).
Samsung Galaxy Fit RRP $179, online $161

The first lesson here is that it is worth checking what the unlocking fee would be if you decided you wanted to switch to another company: despite these charges, it can still make sense to buy a phone outright in locked form from the service provider, depending on the kind of gamble involved. Vodafone customers who don’t want these four phones would be wise to check at third party retailers to see if unlocked versions of the Vodafone contract phones that they fancy are available there, and at what price.

To find out what the provider is really charging for its phones, you need to find SIM-only plans that offer the same included value and usage charges as a contract that includes a phone. At Vodafone, it appears that:

  • A $20 SIM-only, phone aside, is the same as $29 Cap, so the cost of a ‘$0 upfront’ phone is $9 per month on a 24 month plan, i.e. $216.
  • A $35 SIM-only is the same, phone side, as $49 Cap, so the cost of a ‘$0 upfront’ phone is $14 per month on a 24 month plan, i.e. $336.
  • A $55 SIM-only is the same, phone aside, as $79 Cap, so the cost of a ‘$0 upfront’ phone is $24 per month on a 24 month plan, i.e. $576.

Clearly, it makes sense to go for SIM-only if you only want a cheap phone on a 24 month plan. The Nexus S comes at ‘$0 upfront’ on each of these cap plans, but is only worth getting via a contract in the case of the $29 Cap; in the other three cases, it pays to buy it outright and select the corresponding SIM-only plan.

With 12 month plans, there is an additional monthly fee for the Nexus S and the pricing is much more consistent. This phone adds

  • $15 to a $29 Cap plan, so the cost of the phone is $(15+9)*12 = $288
  • $10 to a $49 Cap plan, so the cost of the phone is $(10+14)*12 = $288
  • $5 to a $59 Cap plan (but there is no SIM-only equivalent)
  • $0 to a $79 Cap plan, so the cost of the phone is $(0+24)*12 = $288

The Nokia X3-02, Nokia C2-01 and Samsung Galaxy Fit are $0 on all 12 month plans, so effectively cost $108 on $29 cap, $168 on a $49 cap and $288 on a $79 cap.

The deals that Vodafone offers on iPhone contracts seem rather more obviously better – at least for Cap plans – than a SIM-only with an unlocked iPhone from an Apple Retailers. Here are the figures for a couple of different iPhones:

iPhone 4S 64GB ($999 from Apple)

  • Not available on a 12 month $29 Cap plan
  • Adds $52 per month to a 12 month $49 Cap plan, so the cost of the phone is $(52+14)*12 = $792
  • Adds $47 per month to a 12 month $59 Cap plan (but there is no equivalent SIM only plan)
  • Adds $42 per month to a 12 month $79 Cap plan, so the cost of the phone is $(42+24)*12 = $792
  • Adds $25 per month to a 24 month $29 Cap plan, so the cost of the phone is $(25+9)*24 = $816
  • Adds $25 to a 24 month $49 Cap plan, so the cost of the phone is $(15+14)*24 = $696
  • Adds $10 to a 24 month $59 Cap plan, (but there is not equivalent SIM-only plan)
  • Adds $5 to a 24 month $79 Cap plan, so the cost of the phone is $(5+24)*24 = $696

iPhone 4 8GBis ($679 from Apple)

  • Not available on a 12 month $29 Cap plan
  • Adds $22 per month to a $49 Cap plan, so the cost of the phone is $(22+14)*12 = $432
  • Add $17 per month to a $59 Cap plan (but there is no equivalent SIM-only plan)
  • Adds $12 per month to a $79 Cap plan, so the cost of the phone is $(12+24)*12 = $432
  • Adds $11 per month to a 24 month $29 plan, so the cost of the phone is $(11+9)*24 = $480
  • Add $0 per month to a 24 month $49 Cap plan, so the cost of the phone is $(0+14)*24 = $336
  • Adds $0 per month to a $59 Cap plan, (but there is no equivalent SIM-only plan)
  • Adds $0 per month to a $79 Cap plan, so the cost of the phone is $(0+24)*24 = $576

With Vodafone’s Infinite plans the only difference between a plan with a ‘$0 upfront’ phone and a SIM-only plan is at the $45 level where the SIM-only plan gets an extra 1GB of data, so it is hard to infer the charge for a ‘$0 upfront’ phone.  With these plans, the Nexus S and the Samsung Galaxy Fit are ‘$0 upfront’, as of course are the far cheaper Nokia C2-01 and Nokia X3-02, so it is only possible to see the price of an iPhone in terms of additional monthly charges for upgrading from any of these. For example:
For an iPhone 4S 64GB, the extra charges on Infinite plans are:

  • $45 12 month:  $57 ($684 over 12 months)
  • $65 12 month:  $52 ($624 over 12 months)
  • $85 12 month: $42 ($504 over 12 months)
  • $100 12 month: $38 ($456 over 12 months)
  • $45 24 month: S25 ($600 over 24 months)
  • $65 24 month: $15 ($360 over 24 months)
  • $85 24 month: $10 ($240 over 24 months)
  • $100 24 month: $0.

For an iPhone 4 8GB, the extra charges on Infinite plans are:

  • $45 12 month:  $27 ($324 over 12 months)
  • $65 12 month:  $22 ($264 over 12 months)
  • $85 12 month: $12 ($144 over 12 months)
  • $100 12 month: $0
  • $45 24 month: S12 ($288 over 24 months)
  • $65 24 month: $2   ($48 over 24 months)
  • $85 24 month: $0
  • $100 24 month: $0.

Given the prices these phones are at an Apple Store ($999 and $679, respectively), it may seem hard to justify buying either of them outright from an Apple retailer to use with a SIM-only Infinite. It would make no sense to ask for an iPhone 4 8GB with a $100 Infinite plan given that the superior iPhone 4S 64GB costs no more.

While the earlier calculations revealed the significant discount on iPhones that is achieved if they are obtained via a Vodafone Cap plan rather than an Apple retailer, the implied discount seems even better on the Infinite plans. I was about to conclude that a $45 Infinite plan was an better deal than a $49 Cap plan for an iPhone users, but when I went back to Vodafone’s website for a final check to make sure there was no area in which the $45 Infinite plan was inferior, the plan had been replaced by the $50 Infinite plan with the monthly add-on cost of an iPhone 4s 64GB reduced to $20 on this plan but cut to $10 on the $49 Cap plan. With the $50 Infinite offering unlimited domestic calls and texts but the $49 Cap offering 1GB more data, it is not obvious which one dominates.

Take care, and, as you do so, keep in mind how fast the price of phones is coming down whether you buy them outright or via a service plan: if you can get by with your existing handset for another six month or a year, it may save you hundreds of dollars.

Mugged at the checkout: irrational add-ons at electrical appliance stores September 12, 2010

Posted by Peter Earl in Behavioural economics, Consumer behaviour.
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Like other successful muggers, the retailers of electrical appliances know that surprise the key to taking money from people. As more of us research products on the Internet, it is harder for sales staff in these stores to mug us by telling us surprising things and using them to talk us into spending more than we intended. Often we may know as much as, if not more than, the salesperson does about which product best suits our needs and why, and who offers the best price.

But once we decide, say, which new television or digital video recorder to buy, we’re still not out of the woods: what we’ve just decided to buy is  an appliance that has to be hooked up to something else, and we’ve still got to pay for it. These are two areas in which the retailers can use the element of surprise to make us pay dearly.

If it’s part of a home entertainment system, our new electrical device will be useless without the connecting cable, but we probably forgot to research cables because we had quite enough on our minds dealing with whether we ought to be getting an LCD, Plasma, LED or 3D TV, what sort of energy efficiency rating we can live with without feeling guilty, how big a screen we really need, and so on. What should we do when presented with HDMI cables ranging in price from under $20 up to $300 by a salesperson who suggests that we should go for the top-end cable? Do we really risk losing the gain in picture quality we would otherwise get from hooking a Blu-Ray player to a $3000 state-of-the-art TV rather than an ordinary $1000 TV? In psychological terms, the extra cost of a premium cable tends to seem small relative to the extra cost of the premium TV. This is an obvious area for ‘framing effects’ to be at work.

If we don’t have an Internet-capable mobile phone to research the answer on the spot, or are too embarrassed to challenge the salesperson by doing so, we should defer buying a cable or buy the cheapest one. We should not give into pressure and buy a premium cable. Before coming to the store we had coolly invested our time in becoming informed shoppers.  If it was worth spending an hour on the Internet to save $200 on the TV, it is worth spending an hour to save $200 or more on the HDMI cable. If we buy a cheap cable and discover it is perfectly OK, we won’t need to make a second trip. Even if we were to discover a premium cable is worth having, we could order that online and still avoid making a second trip to the store or a few days of being unable to hook up our new toy.

In fact, if we took a coolly economical approach to the cable choice, we would soon discover that there is little point in buying a premium HDMI cable unless we need a very, very long one. Digital signals either transmit perfect or they are conspicuously broken up; there’s no half-way state of fuzzier images. (See this report. for example

Even if we do the economically rational thing about the cable choice, we may still fall at the final hurdle. Quite aside from the confusion that may be inflicted upon us if we consider using in-store credit, we will face the question ‘Do you wasn’t an extended warranty?’ This is a question we are asked repeatedly as modern consumers of appliances and the fact we get asked it so often should be a warning to us. The retailer is trying to sell us an insurance product each time this question is posed. But if we own lots of these products, and expect to continue to buy yet more as technology moves along, we should normally decline extended warranties. Some appliances will fail when just out of their normal warranty but most will last for years: you win some, you lose some, but if you have a good sample over the long term, then it pays to self-insure.

When an appliance fails, we should buy another with the money saved by not buying extended warranties.  We may also try taking it back to the retailer and pointing out that a ‘consumer durable’ is expected normally to last longer than the manufacturer’s voluntary warranty period and hence there is an ‘implied warranty’ under the Trade Practices Act. According to the Report of the Productivity Commission Inquiry into Australia’s Consumer Policy Framework, extended product warranties often offer little more than the ‘implied warranty’ obligations that manufacturers face.

On top of this, there are the problems that we may run into in getting our appliances fixed under their extended warranties. A third-party contractor, who stands to benefit from having the appliance come back for further work, typically does the appraisal and repair. Consequently, the problem may not be fixed efficiently or effectively the first time the appliance is sent for repairs. The warranty company, at arm’s length from the process can be duped by the contractor more readily than the owner would be if dealing directly with the contractor. This is because the owner can observe the symptoms directly rather than merely reading what the contractor has written on a report. Hence an opportunistic contractor will be much more conscious of the risk of losing repeat business from individual consumers (who may also spread adverse word-of-mouth reports to their social networks) than from warranty companies. The prices of the warranties will need to cover the higher repair costs experienced due to this principal-agent problem.

The trouble is, even if we know all this, we still have to stand firm in the face of the salesperson’s patter. The willingness of salespeople to back off when presented with the economics of the situation varies: some will give in graciously but with others there can be a hostile response as they attempt to prevent their patter from being derailed. In the latter situation just remember: if you tough it out for a few minutes and leave the store without buying the warrant you will probably save more than you can earn in an hour.

For those who aren’t confident about the legal side of implied warranties, it only makes economic sense to buy an extended warranty in a few special cases involving very occasional purchase of very expensive items. One is where consumers are elderly and unlikely to be buying many other expensive appliances during the rest of their lives. Another is where buyers do not have the financial reserves that would be necessary to pay for major repair or replacement costs without having to use high-interest extend credit facilities on their credit cards. Those who are risking bankruptcy by using extended credit on a big scale to purchase all the latest appliances with extended warranty cover don’t come into this second category: they would do better to hold off from buying some of the appliances as well as the extended warranties. By being patient for a year or two, they can save on interest and then benefit from the tendency of these kinds of products to fall in price as technology improves.

Do unit price rules mean shoppers won’t get fooled again? December 23, 2009

Posted by Peter Earl in Competition Policy, Consumer behaviour.
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Queenland recently introduced requirements for supermarkets to display unit prices. It’s natural to think that the this will result in shoppers getting better value for money from supermarkets. Now that retailers have to display the price per litre or kilogram for products sold in packages of different shapes and sizes it’s easy for shoppers to work out what to do, so they’ll make better choices. A no-brainer, really.

Actually, things aren’t that simple. That way of thinking makes two, probably unwise, assumptions. One is that unit pricing will change how we shop. The other is that suppliers who previously were benefiting from confusing consumers will now be brought to heel by being forced to display unit prices.

Even without devious attempts by suppliers to obscure their unit prices, supermarkets offer big challenges to the cognitive powers of consumers.  Psychologists have known for years that people can only keep in mind about seven things at a time. This doesn’t matter if we are trying to choose, say, tofu and there are only a couple of brands and two or three different sizes of pack. But for many products, such as cereals, toothpaste or canned foods, there’s simply too much choice to handle, even if unit prices are displayed.

If shoppers have too much information to process, they will make mistakes. Unit pricing reduces the challenge for those who actually try to make their choices based on unit prices.

But many shoppers are simply too busy to spend time trying to work out the best deal, and are rich enough not to have to worry about whether they are paying more than they need. As long as they feel they are getting a satisfactory deal, these shoppers may not change their shopping routines. Such shoppers may fail to pause and start looking regularly at unit prices.

Without unit pricing, suppliers could cunningly choose how they priced and packed their products to exploit the biases caused by the ways shoppers simplify their choices. Different firms placed different bets on how best to fool us.

If the suppliers can’t confuse us over unit prices, they will switch to doing so by trying harder to make their products seem different and suggesting that we shouldn’t be basing our choices on price alone. We’ll be told to focus on fresh, organic ingredients, superior recipes, more convenient forms of packaging, and so on. We’re less likely to be comparing like with like.

And that’s before the supermarkets themselves try to extract a bigger slice of the takings from their suppliers.  A manufacturer whose product has a lower unit price, other things equal, still has to catch the limited attention of the shopper. This is less likely to happen if the product is displayed near the floor rather than at eye level. To get noticed more readily, the supplier will have to offer the supermarket a better deal so that its product can be displayed in a more prominent position. This will increase its costs, making it hard to keep unit prices down.

So, even with unit pricing in place, the best deals are still going to take careful shopping to uncover. What we also need are rules requiring supermarkets to change how products are displayed.

Life would be easier if they offered posters depicting pictures of each rival product in the same category and their unit prices. Then, we could work out which one to buy and go find it. But even with this we’d still have the ‘like with like’ comparison problem and might be too busy to bother to check, especially if other people were in the way of the comparison display and we knew that the cheapest brand would still be hard to locate on the shelves.

Paradoxically, what Queensland shoppers probably need are more supermarkets and a reduction in the average size of supermarkets so that each supermarket carries fewer products and presents less of a cognitive challenge to consumers. If supermarkets were restricted in size, they would be under more pressure to do the consumers’ shopping for them and be more careful about whether the brands they stocked offered good value for money, as per the Aldi model. Unforunately, with shopping malls largely designed around using giant Coles and Woolworths supermarkets as anchors to bring in customers, this is unlikely to happen.

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