Analyst Angle: The True Cost of Family Rate Plans

Editor’s Note: Welcome to our Monday feature, Analyst Angle. We’ve collected a group of the industry’s leading analysts to give their outlook on the hot topics in the wireless industry. In the coming weeks look for columns from Current Analysis’ Avi Greengart, Compete’s Miro Kazakoff and Jupiter Research’s Julie Ask.
As you may know, we have done a lot of research in the last few years looking at kids, families and how they use cellphones. As anyone who has a nine- or ten-year-old child knows, cellphones and kids are big. They NEED one, Mom, because EVERYONE already has a phone. And, in fact, the penetration of cellphones among the teens and tweens has grown considerably in the last few years and continues to grow.
One of the reasons for this growth is the family rate plan-the ability to add an additional line to an existing account and then share the minutes. According to our surveys, in 2005, approximately 52% of families had a family rate plan. By 2007, this number had risen to 57%.
There are several attractions to the family rate plan products:
–Obviously you can share buckets of minutes among users, so that each family member does not have to get their own minutes, many of which they will never use
–The advertised price of $10 per additional line is attractive, especially compared with a base postpaid rate plan of about $30 a month
–Additional lines can be added for additional family members
–And additional minutes and messages can be added to the bucket as required
–Minutes are not usually wasted, since there are more people dipping into the bucket.
Ask most consumers how much an additional line in a family rate plan costs and they will usually quote the $10 advertised price (try it-I have). Unfortunately, as some of us are finding out, the true cost is a little higher.
OK, try and follow me through this. According to our recent teen-tween survey, the monthly ARPU of a parent with an individual rate plan is $61.05. For a parent with a family rate plan, the ARPU rises to $102.20, an increase of $41.15 a month. Why? Several reasons:
–Operators charge more for a family rate plan than for an individual rate plan with the same number of minutes (even without adding extra lines). For example, T-Mobile USA will give you 1500 minutes on an individual plan for $40, whereas a family rate plan with 1000 minutes and two lines is $70.
–More than two or three lines on a family rate plan will usually lead to an increase in minutes or text messages, unless the family members are unusually disciplined.
Now, the average family rate plan includes 2.86 lines (including the parent line) and each additional line costs about $12.97 (marketing price plus the usual taxes, etc). So putting this all together, the average family rate plan costs a cool $126.34 per month. But if we just consider the incremental cost of the 1.86 additional lines, then the cost per additional line is $35.10 per month. In other words, a parent is actually paying about $35 for each additional line in the family rate plan, not just $9.99 as advertised. I know some of you are gong to want to discuss this more-I have a nice slide that shows the calculation. Email me!
Families are realizing the true cost of family rate plans, especially after the first few months of use. This does not necessarily mean they are unhappy, but rather that they are not getting the bargain they expected. Yes, this may be leading to churn, as well as discussions with the kids about how many text messages they NEED to send to their friends. But the operators need to be careful-if a parent is expecting a child line to cost them $10 plus tax, they are going to be disappointed. And that can lead to churn.
Will the popularity of family rate plans continue? Yes, but the ‘true cost’ realization also opens the door for other options, such as prepaid solutions that incorporate minute sharing, parental controls and other features families want. The family is a major mobile battleground and the competition shows no signs of abating.
Now, go and tell your kids how much they are really costing you.
Questions or comments about this column? Please e-mail Iain at iain@igr-inc.com or RCR Wireless News at rcrwebhelp@crain.com.