Techno-Marketing

Smartphone Subsidies

The market for smartphones has one of the most fascinating examples of creative pricing today. When a consumer walks into a Rogers store, they expect to be able to purchase a high-end smartphone for less than $200, or a simple feature phone for nearly free. What many fail to realize, however, is that the true cost of their $199 iPhone is nearly $700 when purchased off contract. This artificially creates a very low barrier to entry for consumers, and masks the true cost of ownership which comes in the form of monthly billing.

Cell carriers are willing to essentially give away devices, because the true cost of ownership for a high-end smartphone can exceed $3,000 in the first two years of the contract alone (in the United States contracts are typically two years, and in Canada they are generally three). By signing the two to three year agreement, consumers are essentially accepting overpriced data costs in exchange for a cheap phone.

This model, however, has also introduced an undesirable side effect for phone manufacturers: the devaluation of phone hardware in the eyes of consumers. In addition, it has created an extremely crowded, and competitive landscape, with severely limited pricing options. With the introduction of the $99 iPhone 3G (and the subsequent $99 iPhone 3Gs after the release of the iPhone 4) phone prices have gotten to the point that very little price differentiation is available. Even though the 3Gs is only one year old, it has set a very high benchmark for low to midrange phones to compete with, and provides very little room for cheaper phones to compete in. Furthermore, it makes it difficult for anything but the highest-end smartphones to be priced above $99 on contract.

In addition, consumers have developed a psychological price ceiling of $199 for almost any smartphone on the market, so there is also very little room above $99. The real problem then, is that there is no longer any way to effectively price smartphones, especially when all of the real money is being made on monthly plans.

In an Engadget editorial earlier in the year, Chris Ziegler gave his solution to the problem. European carriers have actually already solved it in a unique way, by offering any phone for as low as free, depending on the length of the term that you sign up for. Therefore, a cheap phone will not require as long of a contract, whereas an iPhone or Blackberry will require up to 24 months. This removes the issue of limited pricing options, and allows carriers to differentiate their mobile offerings more effectively based on the true cost of owning a smartphone — the plan. Therefore, Chris recommends that North American carriers follow the example set by their European counterparts, and I would completely agree with his assessment.

For more of Chris’s work you can follow him on Twitter @Zpower (and I have included a feed of his most recent tweets below).