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Film, Razor Blades and Prepaid Wireless Service
Can prepaid services provide your retail operation with a continuing revenue stream?
by Edmond H. Legum

Prologue

Many carriers and retailers are talking about prepaid services. Few are doing much to define the selling activities necessary to effectively introduce the concept to customers. In the article, we help the reader place prepaid service in context: as a dynamic force that can for the first time in a long time cut the retailer back in on the continuing service revenue stream. Through real life examples and provocative questions, the readers are lead to draw their own conclusions about implementing strategies that can open the door to the rewards of selling prepaid service.

Nobody's home right now to answer your call

I called up one provider of prepaid services and asked what I thought was an easy question: "Why should a retailer sell prepaid services?" Before the person I called could answer, I restated the question, and made it a little more difficult: "I mean, let's say I am a retailer making my commissions on selling wireless service; I'm finally getting the hang of this thing; my people aren't wincing when a wireless customer comes up to them; and I'm making some money. A customer walks in, and what should I tell our people to do - sell the regular service, or the prepaid?"

The person I talked to at the prepaid service provider couldn't answer the question, but she assured me someone in the company would have the answer and call me back. We spoke again about a week later, when she reassured me that someone would call me back on this very soon. I never heard back, so I called another provider.

Hello

At Boston Communications Group I spoke to Kevin Thigpen, Vice President and General Manager of their Prepaid Services Division. I asked Mr. Thigpen the same questions, and he had answers. He said, "Retailers might want to sell prepaid to tap new market segments, that they haven't been able to realize." He listed six:

(1) Credit challenged

(2) Budget conscious

(3) Cash preferred buyers

(4) College students

(5) Fleet users

(6) Seniors

I asked Mr. Thigpen, "How might a retailer go about the selling process? Can you walk me through the process that you think might make sense from initial customer contact to final closure?"

Mr. Thigpen recommends that wireless salespeople give their customers the big picture first. Simply put, customers would be given a choice of going with standard wireless plans or prepaid. The presentation may sound something like this,

"If you are looking for no credit check, no contract, no monthly bills, and prefer to keep close reins on your use of wireless service, you may want to consider prepaid service. If, on the other hand, you would prefer the more standard post paid service you may want to consider getting into wireless by choosing from these other plans."

The salesperson might at this point define and compare the activation processes, and ask the customer to choose between the two options. Once a direction has been set, the salesperson then determines calling patterns, minutes of use, coverage, and roaming needs. Based on their answers, recommendations may be made. The customer may then make an informed decision on phone, plan, or denomination of prepaid service.

Which way might make sense?

Compare Mr. Thigpen's approach with the default mechanism that you may have read about in the trade news. Many of these articles focus on carriers and retailers using prepaid service as a device that they pray might capture the 30% of their customers who cannot pass their credit checks.

Think about it. If used solely in this way, the selling process may still follow the current mode of selling standard service from the first. Only at the close of the sale, if the customer cannot pass the credit check, might the salesperson offer prepaid in the context of saving an otherwise lost sale. From the customer's perspective it may be viewed as a consolation prize.

This, I fear, may be the way prepaid is sold today. And, to be candid, it may be easier to do it this way. But to determine if this is the way you want to sell prepaid in your store, you may want to consider what the rewards might be of selling prepaid in a more proactive way.

The payoff

I asked Mr. Thigpen, "Why should retailers change the way they sell wireless and start to do it this way? How can they make more money?" We talked about this for some time. Here is the gist of our conversation.

1. This is the first time in a long time that retailers can gain a share of the revenue stream. Retailer who can create loyal customers that come back to buy the replacement cards, are rewarded with a continuing commission on the repeat business.

Let's do a little arithmetic. Typically retailers may earn about 15% of the value of the card. So, a retailer who sells a $50 prepaid service card makes $7.50. This is $7.50 of pure gross profit - no cost of inventory, just gross profit. If the customer comes in 10 times a year, the retailer makes $75 a year in commissions.

Here's a conservative estimate. If you can create just one customer new prepaid customer a day for a year, and if 50% come back 6 times in year two and replenish their cards with new $50 cards, the projection look like this:

365 customers

x 50% return

x 6 times a year

x $50 prepaid service

x 15% commission

= $8,212.50 in pure gross profit (no cost of goods; no inventory)

To get an idea of the value of this contribution to your P&L, you may want to ask yourself: How much inventory would I have to turn to create this much gross profit?

2. Maybe the returning customer might buy something else when they come back. Prepaid service may actually prove to be a traffic builder.

3. You might want to consider using prepaid services as part of a cross promotional plan. This might take a little creative thought. here's one example: let's say that in addition to wireless your store also sells audio/video products. You might want to sell a video camera for $599, and with it you offer a free $50 prepaid service card as an incentive to buy. But your actual cost of markdown is not $50, but $50 less your 15% commission of $7.50. The customer sees a $50 incentive that only costs your store a markdown of $42.50.

Finally, you may want to ask yourself: can I make more money selling razors or blades? Cameras or film & film developing? Or is it the mix of end products and replacement parts that creates the most robust gross profit potential? Think about it, and then decide for yourself how, if at all, you might make the most of prepaid services.

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