How to Calculate Mobile Phone Service Charges

For several years Lana Friesen and I have been conducting research on how Australian residents choose their mobile phone service contracts. This research, is funded by an Australian Research Council ‘Discovery Grant’. One of the things it has has revealed is that the majority of consumers cannot calculate the cost of a call correctly and do not understand how a bill is worked out if the plan involves – as many do – the purchase of an amount of ‘included value’ (also referred to simply as ‘value’ or ‘credit’) that is greater the number of dollars that have to be spent to get it – as with a plan that offers ‘$450 included value for $29’. Such plans used to be called ‘Cap’ plans but this is no longer allowed: suppliers now tend to call their plans, say, ‘$19’, ‘$29’, etc. plans rather than ‘$19 Cap’, ‘$29 Cap’, etc.

We used the following three questions to test these two essential skills and only 11% of our 1018-strong sample of online survey respondents provided three correct answers. How many can you work out correctly?

Suppose you have a mobile phone contract with the following conditions:

Voice-call connection fee (flagfall): 35 cents per call
Standard voice-call: 40 cents per 30 seconds or part thereof

You make one phone call for 2 minutes and 34 seconds. How much will the call cost you?
(Tick the box you think is the correct answer)
(a) $1.95
(b) $2.00
(c) $2.35
(d) $2.40
(e) $2.75
(f) not sure

Now suppose you are on a plan that offers you ‘$150 included value for a minimum monthly spend of $20’. An individual voice call costs $0.50 per minute (or part thereof) with a $0.40 flagfall (connection) charge, and a standard text message (SMS) costs $0.25.

i) What will you have to pay for using this plan in a month in which you send 60 standard text messages and make 70 voice calls, with each call lasting exactly one minute?

(a) $20 (b) $50 (c) $78 (d) $98 (e) $150 (f) not sure

ii) What will you have to pay for using this plan in a month in which you send 80 standard text messages and make 100 voice calls, with each call lasting exactly two minutes?

(a) $20 (b) $30 (c) $150 (d) $160 (e) $170 (f) not sure

The correct answer to the call cost question is $2.75. (Only 42% of our sample provided the correct answer.) A call of 2 minutes and 34 seconds uses up six 30-second call blocks. The end of the call is disproportionately costly, as the final 4 seconds require payment for a complete 30-second block. The call blocks cost six times $0.40 = $2.40 and the $0.35 flagfall (connection) fee has to be added to this.

The way that a post-paid plan with ‘included value’ works is rather like having to buy a block of foreign currency to pay for phone services denominated in that foreign currency, except that once the block of foreign currency is used up, prices are then charged, using the same numbers, in terms of domestic currency. In effect, this means that if $20 buys $150 of ‘included value’ the cost of using the phone once the ‘included value’ has all been used up jumps to seven-and-a-half times what it was. It is like coming home from a country whose cost of living is much less, where prices look the same in terms of the local currency but where it would take 7.5 units of that currency to buy a dollar back home. When you get your bill these additional charges are added to the upfront charge for the next block of ‘included value’. If the block of included value hasn’t been fully used up by the end of the billing period, you forfeit the unused part and you bill merely consists of the charge for a new block of ‘included value’. (With a pre-paid offer involving ‘included value’, you simply buy a new block of ‘included valu’e when your existing block is used up or you hit the expiry date.)

If we take the two ‘included value’ plan questions as applying to a post-paid service, the correct answer to the first one is $20. (Only 35% of our large sample provided the correct answer to this question.) The answer is $20 because the usage charges are less than ‘included value’. The one-minute calls are $0.90 each (one call block plus the connection fee), which means 70 will use up $63 of the ‘included value’. At $0.25 each, the 60 standard text messages use up $15 of the ‘included value’. Calls and text messages thus use up only $78 of the $150 included value (so one could nearly double the rates of usage and the monthly cost would still be only $20).

The correct answer to the second ‘included value’ question is $30. (Only 19% of our large sample provided the correct answer to this.) This time, the usage exceeds the $150 ‘included value’ that has been purchased by spending $20 upfront. The 2-minute calls each use up two call blocks and each costs $1.40 (i.e. twice $0.50 for the call blocks, plus $0.40 for the connection fee), so 100 of these calls uses up $140 of the included value. The 80 standard text messages, at $0.25 each, cost $20. Total costs are thus $140 +$20=$160, but $150 of this is covered by the ‘included value’, leaving an extra $10 of charges to be added to the upfront charge of $20 that has to be paid each month, making a total of $30 for this month.

If the figures in the second question referred to a pre-paid plan involving ‘included value’, it would have been necessary to buy a new block of credit (i.e., ‘recharge’) before the end of the month and if usage continued at the same rate, this block would run out before the end of the next month. If usage ran at this rate for a year, it would be necessary during the year to buy enough blocks of credit to get 12 times $160 of included value, a total of $1920. Thirteen $20 purchases of credit would be enough for this, with a little to spare, since 13 times $150 = $1950. The total annual cost of the pre-paid cap plan would be 13 times $20 = $260, whereas the post-paid version would cost, at this rate of usage, 12 times $30 = $360. So it pays to think very carefully when choosing plans that are based around buying ‘included value’, especially if a provider offers sets of post-paid and pre-paid plans that seem to have the same unit charges for each service.

Also remember that with pre-paid plans, the expiry period for credit may be only 28 days. If so, even 13 blocks of credit doesn’t quite cover at full year (13 times 28 = 364). If one’s usage never exhausted the included value each month (as with the first ‘included value’ question), then a post-paid plan billed per calendar month would be cheaper than a ‘28-day expiry’ pre-paid plan with identical unit charges, included value and upfront credit purchase.

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