Why are so many customers paying for phones they already own?
Telco customers in the UK are shelling out over half a billion pounds a year on phones they already own. Are split contracts the answer to this overcharging?
Virgin Media O2 has accused its fellow mobile operators of “swindling” millions of customers by keeping them on high contract rates even after they have finished paying for the phone.
The MNO has claimed that customers are overspending by a nosebleed-inducing £530 million a year for handsets they already own, according to their new “Stop the Smartphone Swindle” campaign, launched with an ad instantly recognisable to anyone who watched a DVD in 2005.
This is up significantly on a similar investigation carried out by Ofcom in 2019, which found customers were “only” overpaying by £182 million a year.
In a survey of 5,000 customers, 3.9% were found to be on contracts that have been rolled over beyond their initial bundled plan, and a massive 93% of customers were found to be unaware that they would continue to be charged for a handset they’d already paid for.
Although buying separately is almost always cheaper overall, users typically purchase their handset and airtime from the same provider out of convenience or to avoid the upfront cost of the device. Most handset-inclusive deals are bundled contracts, combining the usual cost of calls, texts and data, with the cost of the handset, for a fixed period until it’s paid off – in theory.
In practice however, these bundles don’t distinguish between the cost of the phone and the mobile service, meaning that customers often continue paying for a handset they’ve already paid for.
VMO2 has made three demands on its fellow operators to help customers:
- Introduce split contracts, separating the cost of the handset from the monthly airtime bill;
- Automatically move customers onto a cheaper, airtime-only plan once their handset has been fully paid for;
- Inform customers once the cost of the handset is paid off.
Virgin Media and O2 both introduced split contract schemes prior to their merger, automatically reducing customer bills at the end of the standard contract term. Now, 95% of their customer contracts are split deals.
Citizen’s Advice highlighted the problem back in 2017, noting that customers of – you guessed it – EE, Three, and Vodafone were forking out an average of £38 per month for phones they already owned.
Which? called the usual suspects out again in 2020, though this time at least, their demands got through to one operator – Vodafone began offering split contracts in June 2021, though customers who joined prior will still be on bundled contracts if they haven’t changed or upgraded.
Of course, these failings disproportionately affect the most vulnerable telco customers; according to VMO2’s survey, of those overpaying for 12 months or more, 60% are over the age of 65, and 44% earn less than £15,000 per year.
Once again, telco customers are being punished for sticking with a single provider for too long, despite the introduction of Ofcom’s Annual Best Tariff Notification (ABTN) which encourages customers to switch to the best deal for them. Launched in 2020, these notifications must inform customers of their contract’s end date, how much they will pay when the contract period ends, and the best tariffs available to them, but clearly this is not having the desired effect.
Furthermore, between 2009 and 2015, the average length of mobile contracts increased by 19%, with 24-month contracts starting to dominate. Combined with the rising price of handsets, monthly payments have increased as well to spread out the increasing costs.
Though SIM-only contracts are growing significantly, there are clearly a lot of people unaware that they may be better suited to this type of alternative plan. And as the global market for refurbished smartphones grows by almost 12% a year, telcos cannot take their customers for granted and expect them to carry on paying these inflated bills.
Bundled contracts are not inherently bad, letting customers spread out the cost of devices rather insisting on payment up front. However, without clear pricing, bundled contracts ultimately obfuscate the cost of the phone and airtime, forcing millions of consumers to overpay at the end of their contract.
Talk to Cerillion now, to find out how our pre-integrated BSS/OSS Suite helps CSPs to bundle and unbundle services with transparent pricing and self-service account controls.