With the new iPhones rolling out this month, many consumers are considering upgrading their cell phones. But what does upgrading really cost you? Is signing a contract worth it? Here’s a detailed look at the true cost of smartphones.
How Much Money Do Contracts Save?
I recently spent some time asking cell phone owners about their opinions on cell phone contracts. Most consumers in my area seem to despise the idea of being locked into a new contract every two years, but also see it as a necessary evil.
“Most phones are outdated in two year’s time, so you’ll need something new by then anyways,” stated one shopper looking at a Samsung Galaxy. When I mentioned the option of buying a phone outright, without a contract, I was greeted by blank “are you serious?” stares that suggested I had a few marbles missing.
The thought of paying full retail price for a cell phone when you can get one discounted with a contract renewal seems to be an absurd option — but is it? Let’s look at the price breakdown.
Retail price of a new iPhone 5c: $549
Price of a new iPhone 5c with two-year contract: $99
Savings by renewing a contract: $450 over 2 years, or $9.38 per month
Oh, wait… you mean I save less than $10 bucks per month by locking myself into another contract? That’s right.
What’s Your Contract Worth?
In order to determine the “worth” of your cell phone contract, we’ll need to look at specifically what you’re paying for every month. Your monthly cell phone charges pay for:
1. Calling service coverage area
2. Customer service
3. Data bandwidth
4. Speed and call quality
As technology advances, which it continues to do every year, your equipment (cell phone) becomes outdated and incompatible with the current network. For example, people stuck with flip phones purchased three years ago are finding it hard to use 4G or LTE services today.
Also take into consideration that speed and coverage area “should” continue to improve over time as carriers update systems and more people require cell signal usage. That leaves customer service and data bandwidth as the only truly independent variables for our example.
Let’s look at Verizon Wireless service. Three years ago, you could get unlimited data for $30/ month. Today, that same $30 won’t even get you 500MB of data on a Share Everything plan. That’s some serious depreciation over three years’ time. $60 now gets you 2 GB of data. That’s in addition to the fact that the new 4G network eats up more data bandwidth than the previous 3G version, according to the sales rep who was trying to talk me into an upgrade.
Customer service then is the only variable left to offset the “cost” of your depreciating Value Proposition of a new two-year contract. Add in the “early termination fee” possibility (up to $350) if you want to change carriers, and your “savings” no longer look so appealing.
The Bottom Line
Consumers tend to approach cell phone purchases as a short-term investment, rather than the long-term investment it truly is. You wouldn’t buy a new car without examining the payment details, so why blindly sign a cell phone contract for the next two years?
Contract-free or prepaid plans provide you the freedom to take your cell phone number and spend your hard earned money where you get the best service to value proposition — which may or may not be your with your current carrier.
Do you have a contract for your cell phone service? Would you consider going with a prepaid plan?
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