Prepay: Upfront and center

F.J. Pollak, president and CEO of TracFone, doesn't think much of conventional wireless wisdom that says prepaid wireless subscribers are substandard. In that view, the profile of a prepaid customer is someone who either doesn't have access to the credit culture that is key to the U.S. consumer market or has shown he or she can't handle it.

Pollak's own wisdom says prepaid is quickly becoming a product for everyone from recent immigrants and teens (the popular image of a prepaid user) to low-volume users smart enough to know how to control their own spending (the not-so-popular image). In fact, TracFone, the largest prepaid provider in the U.S., now sells more phones through that all-American icon of mass retailing, Wal-Mart, than through any other channel.

“Our approach is a mass-marketing approach,” Pollak said. “When we sell TracFone at a Wal-Mart, we're selling to everyone.”

That's not to say that TracFone and other prepaid wireless service providers don't do their share of segmenting customer bases. The Miami-based company traditionally has done well in the Hispanic market, in part because of its heavy advertising in Spanish-language media and the fact that three-quarters of its call center representatives are bilingual. It also has created some specific campaigns for African-Americans, and it is studying the teen market.

And while prepaid has become popular with carriers trying to breach the plus-50% penetration rate, there still is debate on how the business model should work. TracFone's original handset model, which keeps track of minutes used and account balances on the user's device, has worked well for years. At the same time, some in the prepaid world believe things must move to a network-based model in which network software does most of the heavy lifting.

“We like the switch-based model better because it creates a lot more flexibility with the handsets,” said Mike Mohr, president of Celluphone, a Los Angeles-based prepaid provider that itself is starting to target the Hispanic market in California.

Boston Communications Group Inc., which provides a service bureau to carriers wanting to follow the network model, believes as service providers move into the mass market with prepaid they'll want to keep as much of the intelligence and control in the network as possible. That's especially true as new prepaid data products and m-commerce begin to emerge, said Tom Erskin, vice president of product development for BCGI.

“Our job as a vendor is to envision those problems ahead of time so that when we meet with carriers, the technology issue is off the table,” Erskin said.

However, that time may be a ways off, particularly given the dynamics of the prepaid market, where churn is significantly higher than it is with post-paid service.

“We still sell a lot of Nokia 5100 phones, which isn't typical of most carriers,” Pollak said. “We generally are dealing with the lower-volume user, so we never look at ourselves as a first to market.”