The iPhone 4 is out now available from Verizon, and it is predicted to be a blockbuster. AT&T is expected to lose iPhone customers in droves to Verizon’s plan which has virtually the same cost and little difference in service. Why? Because Verizon has a reputation of having better coverage than AT&T. That means fewer dreaded dropped calls. There are some drawbacks. The Verizon plan doesn’t have some multitasking features – such as making a call and surfing the web at the same time – tricky to do at best.
So how does AT&T use this expected migration away from its plans to improve its overall profitability? Are the customers that will remain with AT&T more profitable? My guess is that they are. The customers that will migrate may be more data intensive users that are stretching the limits of their fixed fee data plans. Switchers are probably less loyal as branded consumers. They may be less satisfied with cell phone service, live in more remote areas, and in general take up more time on service. Nothing wrong with a high maintenance, non-loyal consumer now and then, but are they less profitable in the long run?
The Auto Insurance Example
Let’s look at an example of another service category that cuts across a wide segment of the population – Auto Insurance. While consumers are never in love with their auto insurance companies, take a look at Allstate’s strategy. They have been advertising a program called declining deductibles – which in essence means that as your good driving record continues over time, the amount you would pay on a deductible goes down, eventually to zero.
Think about this strategy – it appeals only to good drivers which are more profitable to Allstate since they have far fewer claims. This is Allstate’s way of rewarding good (profitable) customer behaviors while sticking unprofitable consumers with much higher costs. This program also builds on the tiered pricing strategy of insurance but goes as far as giving incentives back to the most profitable customer. Let Geico and Progressive take the price switcher – likely switching on price because of less clean driving and accident records. My first hand knowledge will attest to the exorbitant rates Allstate will likely charge if you have an accident and a subsequent speeding ticket the same year after many years of uneventful insurance relationship. I also bet that the accident where you get to use that zero deductible you have been earning for all those years will cost you a fortune when your rates go up the following week.
But the lesson for AT&T is this. If you are going to lose consumers, which is inevitable, build incentives that reward and maintain the consumers that are most profitable based upon their lower usage against the fixed fee data plans, multiple family members and participation in only value added service that can be priced up. Let Verizon have the less profitable consumer.
