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Economics of the Wireless Industry

Throughout this guide, we've highlighted a number of issues that affect what you will pay for your cell phone and your plan. In this section, we offer a bit of background on the economic factors of the wireless industry to help explain why plans and phones are priced the way they are and how wireless companies make money.

New Customer Acquisition

It costs a cell phone company about $350 to acquire a new customer. This amount varies depending on where the customer signs up (carrier store, independent retailer, or online), but when the commissions, phone subsidies, and marketing are added in, $350 is a reasonable ballpark figure. So, basically the carrier is $350 in the hole when you start your service and they need to make that up before you become profitable to them.

Thus, the carrier wants you to commit to spending as much as possible each month so they can recoup that $350 as quickly as possible. One way they do this is by making rate plans progressively more attractive as you agree to a higher monthly commitment. So, while a carrier might offer just 250 minutes for $29.99 a month, it might offer 600 minutes for $39.99 a month, with a free phone and unlimited nights and weekends.

The other carrier goal is to try to make you stick with them at least long enough for them to get that $350 back. This is partially the reason for requiring a contract.

Ongoing Customer Profitability

Most of a carrier's costs are fixed, except for the initial outlay they spent to acquire your business; they don't have to put up any new cell towers or hire extra staff just because they signed you up. Therefore, the customer who uses 1,000 minutes a month really doesn't cost them much more than the customer who uses only 200 minutes. So the more you spend each month, the faster you will be profitable for the carrier.

As you can see in the above chart, the $59.99 customer becomes profitable three or four months sooner than the $39.99 one, while the $29.99 customer may take longer than a year to reach the point of profitability. Since the price for voice airtime has been falling in recent years, the ability to gain additional customer revenues through new data services is going to prove critical to industry profitability in the years ahead.

How You Can Benefit Because of the importance of revenue, you will often find that the best deals on phone prices come when you commit to a rate plan of $39.99 or more per month. This is particularly true when buying online from an independent retailer. Carriers tend to pay less commission — and thus phones are subsidized less (and thus more costly for you) — on lower-priced plans.

Monthly Profitability

Ignoring acquisition costs, let's take a look at how the carrier makes money on you each month. Let's say you have a $39.99 rate plan that includes 600 minutes, with additional minutes costing 40 cents each.

As you can see, up to 600 minutes, you are paying the carrier $39.99, so their profit decreases a bit with each minute of airtime you use. As discussed above, this is not a great immediate cost for the carrier, but use of the network does affect capital spending they will be forced to make over time, so ideally they'd like to take your $39.99 and have you not use the phone at all.

However, in reality the carrier would like you to talk more than your allotted minutes on your $39.99 plan. This overage rapidly increases your bill — and thus raises profits. Overage used to be a huge moneymaker for the wireless industry, but this has become less true as competition has forced the carriers to bundle more and more minutes into lower-priced plans.

How You Can Benefit. On the long-running TV game show The Price Is Right, a contestant's objective is to get as close to the right price of a particular product with his or her guess without actually exceeding the price. That is exactly your goal in selecting a plan — to get as close to the actual number of minutes you need without exceeding that number.