Several months ago, T-Mobile USA (NASDAQ:TMUS) unveiled a new pricing strategy aimed at winning customers back from larger rivals Verizon (NYSE:VZ), AT&T (NYSE:T), and Sprint. T-Mobile decided to do away with the traditional subsidy model, where customers sign a two-year contract and are then entitled to a discounted smartphone.
Instead, T-Mobile customers were given the option of paying for their phone upfront or making a small down payment and then spreading the cost over 24 monthly installments. Either way, users were not tied into a service contract (however, phones bought through T-Mobile would not be unlocked until they were paid in full). The biggest upside for customers was lower monthly service fees. This would lead to much lower bills for customers who did not need or want a new phone every two years.
However, T-Mobile has had trouble sticking to the plan. While the no-service-contract policy has remained constant, pricing and terms have changed repeatedly over the last four months. Most recently, T-Mobile announced that it would be doing away with down payments entirely -- for now. The constant changing of prices and policies is more likely to confuse customers than attract them. T-Mobile needs to figure out what pricing strategy seems most promising, and then give it time to work. Otherwise, failure is certain.
The confusing nature of T-Mobile's pricing changes can best be seen in the fluctuating price of Apple's (NASDAQ:AAPL) iPhone 5 since it launched on the network in April. The 16 GB iPhone 5's initial price at T-Mobile was $99.99 down plus $20 per month for 24 months. That worked out to a total payment of $579.99 over 2 years, roughly $70 less than the Apple Store's price.
A month later, T-Mobile raised the down payment for the iPhone 5 by $50 while leaving the installment payments steady at $20/month, stating that the initial pricing was a limited-time promotion. Earlier this month, T-Mobile tweaked pricing again, cutting the down payment by $4 and raising the monthly payment by $1 to $21 per month. It's probably not a coincidence that the iPhone 5 cost $649.99 after these machinations, which is essentially the same unlocked price as Apple and its other carrier partners offer.
Last Friday, the company introduced yet another pricing scheme. This time, T-Mobile is getting rid of the down payments, while raising the installment payments to offset that loss. The 16 GB iPhone 5 now costs $648, payable in 24 monthly installments of $27. This move is also touted as a limited-time promotion.
Is this helping?
It's hard to know exactly what executives at T-Mobile headquarters are thinking. The iPhone pricing changes may be tied to some extent to Apple's regulations on pricing for resellers. T-Mobile's recently introduced "JUMP" early upgrade plan may also be playing a role. The JUMP program allows customers who pay a $10 monthly fee to upgrade their phones as often as twice a year. It could be that some of the pricing changes were designed to make the early upgrade offer financially workable.
Whatever the cause, these frequent price changes are unlikely to lead to a good result for T-Mobile. While T-Mobile is trying to create an innovative business model, industry behemoths Verizon and AT&T have shown a willingness to mimic the most popular elements of its plans. For example, both Verizon and AT&T came out with their own early upgrade offers within weeks of T-Mobile unveiling its JUMP plan . While T-Mobile seems to be offering better terms than Verizon or AT&T, the gap is narrow enough that it will be hard for T-Mobile to pull longtime customers away from its rivals.
T-Mobile isn't going to be able to gain a competitive advantage over Verizon and AT&T by changing pricing and other aspects of its plans every month or two. Running a short-term promotion may boost sales a little bit, but the risk is that it undermines the brand's message. T-Mobile's new mindset is a refreshing change of pace for the wireless industry. Management just needs to pick a price scheme and give it time to work. Otherwise, would-be customers are bound to lose patience.
Fool contributor Adam Levine-Weinberg owns shares of Apple and is long January 2015 $390 calls on Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.