Entner: How overages can benefit wireless consumers

Roger Entner Recon AnalyticsThe FCC has received countless comments and filings regarding the issue of Bill Shock. Based on a review of more than 78,000 customer accounts by the Nielsen Company in its Consumer Values Metric product, which collects wireless phone bills, we can determine how often people actually go into overage, by how much they go into overage, and the trade-offs they make. The data may surprise many.

It turns out that relatively few cell phone users exceed their calling limits and experience overages; those who do typically experience an overage only one or two months out of the year; almost all customers with overages are better off financially if they pay extra charges occasionally rather than changing to higher-tiered plans.

Indeed, the data show that most consumers are making smart financial decisions that amount to de facto formulation of their own lowest cost cell phone plan. This behavior is the logical response to carriers' decisions to reduce the number of plans in response to customer demand. Let me explain.

In past years, one of the most frequent consumer complaints about shopping for a wireless service was the excessive number of rate plans and the difficulty of picking the right one. Wireless carriers responded to customers' concerns and simplified their rate plans, reducing both the number of plans available and the pricing increments within those plans.

Operators employ a good, better, best approach for wireless voice with three options as provided in Table 1. The increment between the good and better levels is $20, and $10 from better to best, for AT&T, Sprint and Verizon Wireless. For T-Mobile, the level increment is $10. The associated amount of minutes varies among the carriers, but the best level usually offers unlimited voice calling.

The drawback of simplicity, which is something that consumers were clamoring for, is the increased likelihood of consumers having mismatches between their actual usage and the available bundles. For the vast majority of customers, the bundles work well, as they incur no overages while enjoying financial predictability. Other customers choose prepaid service as a viable option, with prices often on par with post-paid plans. A third category of consumers is making the deliberate choice to incur overages a few months per year because the annual cost of overages is below the cost of moving to a higher price plan. For most operators, the break-even point for making the change from the good to better product is $240 per year; for T-Mobile $120; the change from the better to best package for all national carriers has a breakeven point of $120 per year.

In Table 2 above, both the source data from the Nielsen Study and a table showing the annualized overages for each occurrence, distribution, and mean is provided. I have color- coded the annual overage amount, with green indicating overages below $120, blue indicating overages between $121 and $240, and yellow indicating overages of $241 and above. The blue and green cells show that customers who are with carriers that have a $20 step between price plans have made the right economic decision to have incurred overages rather than to have subscribed to a higher price plan. The green cells indicated that it was the right decision not to take a $10 step up. Based on this analysis, only 0.3% to 0.5% of accounts (the sum of accounts in yellow cells in Table 1) are actually worse off by going into overage than they would have been with a higher price plan. This represents that only 345,000 to 575,000 accounts of 115 million total accounts nationwide are economically worse off by going into overage. I have to estimate this number because of the lack of granularity in the 95th to 100th percentiles of the data given. In any case, we are talking about an extremely small percentage of wireless post-paid users.

The mismatches between actual usage and price plans are usually quite small. When you divide the overage by the cost of an overage minute (45 cent typically) you find out that people generally go by less than 200 minutes over per month. This is less than a one step upgrade. Accounts that incur heavy overages would generally be better served by a higher priced plan, which carriers as a rule offer to such customers (even retroactively in most circumstances).

It is important to trust consumers to make rational economic decisions. There is substantial evidence that consumers make deliberate choices to incur overages rather than upgrading to a more expensive monthly rate plan and that they overwhelmingly benefit from such choices. When a consumer calls and complains about an overage, operators will generally offer the customer the ability to upgrade his or her plan, which is often available retroactively. Such an upgrade costs either $10 or $20 and would have avoided what the FCC calls "bill shock." Nevertheless, 7 percent of accounts persist in engaging overages more than once. For these customers, it is in their economic self-interest to continue to incur overages. 13.5% of wireless customers incurred voice overage charges during the course of the year studied, and of these customers, 19 of 20 made the most economically beneficial choice by incurring the excess charges instead of paying an extra $10 per month for a higher rate plan. A similar percentage made the correct economic decision to incur overages instead of upgrading at $20 per month. In fact, through a strategic combination of rate plans and occasional overages, consumers who some say are victims of "bill shock" actually saved themselves between $882 million and $2.4 billion in just one year. The $882 million figure is based on a $10 upgrade and the $2.4 billion is based on a $20 upgrade, by subtracting the annual cost of the upgrade from the annual amount of the overages multiplied by the number of incidents.

Most other analyses of overages have simply focused on the overage charges that consumers incurred but have forgotten that the consumers also received services for which they owe the carrier compensation. The full report which I wrote for the WCA is the first analysis that takes into account both overage costs to the consumer and the actual benefits the consumer derives through choosing to incur those charges instead of upgrading his or her rate plan.

The full report is available here.

Roger Entner is an analyst and founder of Recon Analytics. He can be contacted at [email protected]. Recon Analytics provides actionable insights for business executives and policymakers for the telecom market.