An interesting trend over the last couple of years is the gradual rise of annual pre-paid schemes from service providers.
A few technology companies like Vonage, Skype and even Virgin Media and BT are offering this yearly method of payment to their customers and it looks like a no-brainer when it comes to the pros of embracing it.
Given how low saving interest rates are at the moment, it may be cheaper to use existing capital to pre-pay for services once a year, especially if the discount for paying up-front outweighs other forms of investments (savings, stocks, etc).
The savings attributed to the annual cost of the service represent only part of the total equation. An annual pre-paid option cuts down the number of invoices/statements that are sent out (one instead of 12), which not only saves money for the business, but uses less paper - always a good thing.
Other hidden costs, which are often difficult to calculate, include any transactional fees, the opportunity costs of manually initiating the purchase, and managing any receipts.
What’s more, paying in one lump sum protects the customer from price rises that could occur over the year and reduces the 'exposure' risks associated with making regular bank account transfers and/or online payments (fraud, mistakes, etc).
Obviously, the main downside is having the available funds to afford the lump sum in the first place.
Offering an annual pre-paid option to customers is still a unique selling point and enables the service provider to differentiate itself from the rest of the industry. Take, for example, the UK Telecoms market. Savers hard-hit by the low savings rates and increasing costs of living seem to have embraced annual prepaid for line rental.
Initially offered by BT, Virgin Media and TalkTalk, customers can now opt for that option which can save them nearly 30 per cent off their line rental costs.
Annual prepaid also helps the service provider reduce the costs (real or opportunity) of acquisition, which is significant especially in a mature, undifferentiated consumer market like fixed broadband; plus it locks the customer in for at least one year. And as highlighted already, it also reduces the costs associated with handling payments since a company would only process one rather than 12 invoices per year. Perhaps more crucially, though, is the fact that it eases any cash concern for the company – especially small ones - as it brings in liquidity.
Annual pre-paid contracts need to become the norm rather than an exception whenever possible, particularly when it comes to web-based and technology-focused services. When done properly, it can benefit both the customer and the service provider, and isn't that the ideal market scenario?