IDC: Who wins and who loses when carriers tweak loyalty programs

Ramon Llamas IDCI love the perks for being a loyal customer.

As a kid, I got a free donut from Dunkin' Donuts for every six visits I made. As I got older, my tastes changed to include other things: comic books, compact discs, movie tickets. Today, I look forward to getting money back from using my credit card or flying with a particular airline. After all, it's kept me a loyal customer, even in the face of rising prices.

But when customer loyalty is no longer rewarded or benefits reduced, what then? The expectation is that the customer will stay, and in most cases, he or she probably will. My allegiance to Dunkin' Donuts continues to this day without the lure of a free donut.

Last week, Sprint announced that it will change its Premier loyalty program starting April 1. In the past, loyal customers of ten years or more, or customers who paid at least $69.99 on an individual plan or $99.99 on a family plan each month were offered the ability to upgrade their handsets every 12 months, as well as other benefits and discounts. In the new plan, the Premier program will be split into "Gold" and "Silver" customers. Gold customers must still have ten years of loyalty, but must pay at least $89.99 on an individual plan or $169.99 on a family plan, an increase of 28.6% and 70% respectively from the previous levels. Gold customers will still be able to upgrade every 12 months. Customers who pay between $69.99 and $89.99 on individual plans or between $99.99 and $169.99 on family plans will become silver customers. These customers will no longer have the benefit of upgrading every 12 months, but will receive other benefits and perks. It should be pointed out that Sprint customers paying at least $39.99 per month will continue their eligibility for the company's "New For You" program, which provides users with $75 in discounts every 12 months.

In a similar fashion, Verizon Wireless eliminated its "New Every Two" program, which offered customers a credit of $30 to $100 towards a new phone. Historically, customers could use this credit 13 months into a two year contract. New customers to the program will now have to wait until 20 months into a two year contract. Customers on the old program prior to January 16 have been grandfathered in under the old rules, but only towards their next purchase.

Who stands to win?

Carriers. In the case of Sprint, customers on the popular and less expensive Everything Data plans ($69.99 for individual or $129.99 for family) will have to move up to the more expensive Everything Data plans ($89.99 for individual and $169.99 for family, with the difference coming from the number of anytime minutes) to be a part of the Gold Premier program and earn an early upgrade each year. That brings in more revenue from the same customers whose data consumption habits may not change all that much by changing plans. Not to be overlooked, earlier this month, Sprint increased the monthly data charge for smartphone users by an additional $10. This surcharge, combined with Sprint's less expensive Everything Data plan is still not enough to be a member of Sprint's Gold Premier program. A customer would have to move up to the more expensive $89.99 plan and pay the $10 smartphone increase to be a member. That's an increase of $40 per month.

But the changes to these upgrade plans go beyond generating more revenue for the carrier; it also has implications for inventory that carriers will hold at any given time. Consider this: If customers have to wait longer to upgrade their phones (from 12 months to 24 months, for example), carriers can carry less inventory on hand to meet lower demand. Having less money tied up in inventory allows a carrier to invest money elsewhere: network, marketing, services, or other areas. The key benefit here is that carriers will have more money on hand to put elsewhere.    

Who stands to lose?

Customers on annual upgrade plans. A friend of mine considers her ability to upgrade her handset each year her "Christmas in August," and it's been an annual celebration for her. She never thought of it as a privilege; in her mind, it was her right (and gift to herself) for being a loyal customer. When I mentioned what her carrier was doing, she was gravely disappointed that this yearly gift is about to disappear. She, like many others, watches how she spends her money, and spending more to upgrade her mobile phone annually will most likely not be an option for her.

Mobile phone vendors. If customers upgrade their handsets less often, carriers can hold less inventory. If carriers hold less inventory, vendors will ship fewer phones to meet demand. If vendors ship fewer phones, there is potential for less revenue to be had. Moreover, to maximize profitability, mobile phone vendors may seek the cost-cutting alternative of rationalizing their portfolios and offering fewer SKUs. Of course, this may be an extreme case, but it is something that mobile phone vendors will be examining closely.

Who remains unaffected?

Anyone who does not participate in an annual upgrade plan. No money spent on annual upgrades translates into no money saved without them.

Some final thoughts

While many customers on Sprint's or Verizon Wireless's respective annual upgrade programs may complain of losing (or doing more to keep) this privilege, it is very unlikely the reason why a customer would leave a carrier behind and sign up with another. Such upgrade programs are widely considered 'nice to have' options, but clearly come behind other factors, such as the cost of a phone, the monthly voice and data service that go along with it, and the quality of service. Sprint's and Verizon Wireless's recent moves, though unpopular with some of their most loyal customers, will do little to lose them.

Ramon Llamas is a senior research analyst with IDC's Mobile Devices Technology and Trends team. In his role, Llamas tracks the quarterly results of the leading and emerging mobile device vendors, and uses the data to forecast the short-term and long-term direction of the mobile device market, and how it affects handset vendors, carriers and customers. He recently released his worldwide mobile phone and smartphone 2010 - 2014 forecasts, as well as a worldwide forecast of the mobile phone touchscreen market. In addition to being featured in FierceWireless, Llamas has been featured on Bloomberg Radio, National Public Radio, and quoted in Investor's Business Daily, the New York Times, and the Wall Street Journal. Llamas can be reached at [email protected].