Prepaid Cell Phones: The New Growth Industry

The landscape of the mobile cellular phone market has shifted in recent years. While the overall mobile phone market continues to grow, traditional post paid plans are shrinking in total market share. Contract plans are quickly being replaced by cheaper prepaid cell phones.

Prepaid vs. Post Paid

The two general types of mobile phone plans are prepaid and post paid. With prepaid, you pay for your minutes upfront. With post paid, you pay for minutes at the end of each month. Post paid plans require a credit check and a contract because you pay for your minutes after you’ve used them.

Growth Statistics

The cell phone market has grown every year since its inception, and the overall market continues to grow. In the United States, over 80% of the population now uses cell phones. That trend continues to grow, although much slower now than in previous years.

Traditional contract phone plans have been the primary niche within the cell phone market and that niche grew year after year. However, in 2008 the growth trend started to slow. From 2008 to 2009 the net additions of post-paid customers across all major carriers fell 58 percent. In 2009 the post paid subscriber growth actually reversed and the market share is currently shrinking.

Meanwhile, prepaid customers are increasing. In 2008 about 50 percent of new cell phone users signed up for prepaid cell phone service. The next year, in 2009, about 80 percent of phone subscriber growth came from prepaid plans.

Historically, prepaid phone plans have been used by two types of people: young people and people with bad credit. Because traditional post paid plans require a credit check, many people have been unable to purchase a traditional post paid cell phone. Traditionally, those people with no credit or bad credit have made up the bulk of the prepaid market. The one disadvantage of prepaid plans, up until recently, was that prepaid cell phone plans have been more expensive than post paid plans.

Prepaid Is Now Cheaper

However, a few years ago the price of prepaid plans started to come down. Now prepaid cellular phone plans are significantly less expensive than post paid plans. Many prepaid carriers are now even offering unlimited minutes plans that are less expensive than comparable contract plans that have 500 minutes. The current low cost of prepaid plans and the downturn in the economy are fueling the explosive growth of the prepaid cell phone market.

Of course, the major cellular phone companies are not happy about this, since they make much more money on contract plans than they do on prepaid. There are three reasons for this is. The first is that post paid plans are more expensive than prepaid plans. Traditional contract plans can run upwards of $80 a month while a prepaid plan with the same minutes could be as cheap as $40. Second, not only do mobile phone companies make more money on contract plans, but they have a secure recurring income stream by locking their customers in with long term contracts. The third reason post paid plans are so lucrative for the cell phone companies is that they charge exorbitant rates if you go over your minutes allowance, sometime 25 or 50 cents per minute. This adds up very quickly and many people have accidentally run up huge cell phone bills of several hundred dollars.

Of course, with prepaid plans, you don’t have this issue. Prepaid plans are now cheaper per minute and they don’t have contracts. Also, if you go over the minutes that you’ve purchased, you can simply buy more minutes.

The Future of Cell Phone Plans

Contract cell phone plans continue to be popular with consumers, though. The primary reason is that the handsets that they offer are cheaper, at least up front. Many consumers continue to pick contract plans because they can’t afford a $600 phone. The carriers will subsidize the price of the phone when customers sign a two year contract. In contrast, prepaid handsets are more expensive since none of the price is subsidized. Consumers have to pay full price for prepaid handsets. What consumers don’t realize is that the carriers are able to subsidize the cost of the handset because they know that over the course of that two year contract they’ll make up the cost of the phone (and much more.)

Prepaid plans continue to gain market share, though. They just make more sense for consumers financially. The economy has been bad for years and there’s no end in sight. The lower overall cost of prepaid cell phone plans will continue to boost their popularity and more consumers will choose prepaid plans over the traditional post paid contract plans.