Is Prepaid Really a Customer Segment?

(Nov 1 2011) Mobile Internet

1. By Declan Lonergan, Research VP, Yankee Group

   In some countries, such as the U.K., there has been a shift from prepaid to postpaid services during the past 12 to 18 months. Despite this trend, however, prepaid will remain a critical feature of the European mobile communications marketplace for the foreseeable future. 

   Overall, prepaid accounted for 53 percent of mobile lines in Western Europe at the end of 2010. Despite recent migration toward postpaid services, prepaid will still account for an impressive 45 percent of mobile lines in 2015. In Italy, prepaid will remain the dominant payment method, accounting for 76 percent of all lines by 2015. But is prepaid versus postpaid a valid and helpful basis for mobile customer segmentation today? Has it outlived its usefulness?

   It’s important to acknowledge prepaid and postpaid customers are considerably different in terms of their mobile spending behavior. Prepaid customers in Western Europe have average revenue per user (ARPU) of just €9.63 per month. This is approximately one-quarter of the ARPU level for the average postpaid customer (€37.29).

   But when it comes to mobile device purchase intentions and brand aspirations, prepaid and postpaid customers have quite a lot in common. In our 2011 European Consumer Survey, which was fielded during May and June, 55 percent of prepaid respondents said they were likely to buy a smartphone with a data plan within the following six-month period. This compares with 62 percent of postpaid respondents. Considering the dramatic differences that exist between these two groups in mobile ARPU, our data shows there is nowhere near as significant a difference in handset buying intentions. Prepaid customers’ appetite for high-end devices is not far behind that of postpaid users. 

   Because prepaid customers spend less on average than their postpaid counterparts, there is an understandable temptation to assume they will settle for less aspirational device and OS brands. Evidence from our European Consumer Survey disproves this point. For respondents who indicated they were likely or very likely to buy a smartphone within the following six-month period, we asked what type of smartphone they expected to buy. 

   The proportion of customers choosing Apple as their preferred brand is identical for both groups: 40 percent. For each of Android (Google’s OS), BlackBerry (RIM), Nokia and Windows Mobile (Microsoft), there is also a remarkable level of consistency in the responses. Allowing for margin of error, we can conclude that across all device/OS brands examined in our survey, European prepaid and postpaid users’ buying intentions are almost the same. 

   The Mobile Internet Unites Prepaid and Postpaid
   In our consumer survey, we explored Europeans’ behavior in relation to accessing the Internet from mobile devices. The first question we focus on is whether or not customers use a phone or smartphone to access the Internet. Again, there is very little difference between European prepaid and postpaid users when it comes to mobile Internet access. Two-thirds of our postpaid respondents claim to use the service, compared with 63 percent for prepaid users. Allowing for normal margins of error, there is really almost no difference between the two. This indicates that prepaid versus postpaid is not a helpful basis for segmenting customers in relation to mobile Internet access behavior. 

   Western European prepaid users certainly do spend less on their mobile services, and from an operator perspective there is some value in continuing to treat prepaid and postpaid users as separate categories. But on several key metrics, there is little difference between prepaid and postpaid customers. It’s therefore time for the entire mobile industry to re-think the validity of treating prepaid and postpaid as distinct customer segments with different characteristics, customer profiles and needs.

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