Reference no: EM132604939

Question - Wireless service carriers typically pay large subsidies to acquire customers. This results in industry wide average acquisition costs of $310. Industry figures suggest the average carrier earns $55 per month in revenues. Margins in the industry average 30%. Although some carriers have offered plans without contracts, post-paid plans with contracts have been the norm in the industry. Contracts tend to extend the life of a customer. On average, the expected life of a customer under the contract model is 4 years. Without a contract, the expected life drops by 50% (HINT: In the reading on customer management and the notes we explored the relationship between expected life and retention rate) Recently, TMobile has begun advertising no annual service contracts.

a) Under the current industry economics (i.e. assuming costs, revenues, and margins are unchanged), what is the effect of eliminating contracts on the net lifetime value of a customer (assuming an annual discount rate of 10%)?

b) What advice would you give TMobile as they transition to no contracts?