Family Cell Phone Plans: A Proving Ground for Consumer Bundling

December 15, 2016


Smartphones are everywhere, and millions of families contain their monthly costs by using a family subscription plan. What most of them don't realize is that they are part of a bundling of consumers that is new and not completely understood.

"We're used to bundling of products," said Preyas Desai, a professor at Duke University's Fuqua School of Business. "Almost every fast food place offers a combo of a burger, a drink and some fries. Sometimes you buy one product and get another product packed with it. But bundling of consumers is still quite unusual, and family cellphone subscription plans even more so in that they allow consumers to bundle themselves."

Consumer bundling allows firms to improve customer satisfaction, Desai said, while increasing their profit through market segmentation - grouping customers by shared characteristics, in this case the amount they use their phones and how much they are prepared to pay.

It's easy to see how family plans benefit cellphone customers.

"You can bring in new young customers - children - easily," Desai said. "The parents may already have an account, adding one more member is very easy and you don't have to maintain another separate account."

But family plans also add value to customers through combined allowances. Many consumers pay an overage charge if they exceed allowed amount of data per month, and those charges can sting. The Federal Communication Commission has found about 30 million consumers have experienced a bill shock at least once. 

"Smart consumers try to avoid the bill shock by monitoring the usage, but monitoring is a hassle too," Desai said. "Family plans allow members to combine their allowances and reduce the chance that they get a bill shock. In a given month, I may use the phone more but someone else in my family may use the phone less. If everyone's usage is not correlated - is everyone's usage does not go up or go down at the same time - we can reduce the chance of bill shocks by pooling our plans."

Avoiding bill shock is crucial for companies too, Desai said.

"Although bill shocks are psychological costs, they get converted to real dollars for phone companies," he said. "Companies will make more money when consumers are more satisfied and less money when they are dissatisfied."

Family plans can be profitable when they draw in low-valuation consumers not served by individual plans, Desai said.

"Interestingly, we find that even when a family plan does not draw any new consumers into the market, a firm can still benefit from offering it," he said. "That's partly because families typically obtain a higher allowance compared to the purchase of several individual plans and therefore contribute more profits to the firm."

Family plans are also important for market segmentation because they allow companies to separate customers by usage rates and by how much are they willing to pay for the service, much like airlines do, Desai said.

"So there may be a cheaper plan for someone who does not use the phone much - that will be like coach class in air travel - and there may be a more expensive plan for someone who needs the phone a whole lot more, which is akin to first-class in air travel," Desai said.

Family plans can also help companies avoid what's called cannibalization, which occurs when a firm's products compete with one another. Desai's latest research with Fuqua colleague Debu Purohit and a former Ph.D. student Bo Zhou found family plans help reduce that effect by channeling low-usage customers into family plans, which don't compete with more expensive high-usage plans offered to individuals willing to pay the higher price.

"You make the cannibalization problem simpler for yourself because with family plans there are less people who buy low usage individual plans," Desai said. "This can make segmentation more efficient and improve the firm's profits."

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