Market emergence – prepaid phones

Reliance Infocomm, after launching their prepaid business in India, introduced an new scheme. Pay Rs 4,300, and get a mobile phone PLUS prepaid vouchers worth Rs 4,300. Effectively, you’re getting a mobile phone for free. The scheme made good financial sense for Reliance. With a million subscribers to this scheme, they could recover Rs 430 cr of their upfront capital investment and retire their debt. Besides, the Rs 4,300 would have normally been bought over a period of around three years by prepaid subscribers, making its present value around Rs 3,600, at an interest rate of 12%. Add to that the reduction in distribution cost due to bulk selling, and possibility of non-usage, etc… the economics might work out.

But after the scheme was launched, Reliance was puzzled. Why did the sale of their normal prepaid cards dip? Any new prepaid customers would obviously go in for the new scheme. But old prepaid customers would still need prepaid cards, and should have bought them from the dealers. The dealers should have come back to Reliance to stock up their prepaid cards. Why didn’t they?

What happened was, they hadn’t anticipated was the ingenious market. Many new customers didn’t need the full Rs 4,300 worth of talk-time. Spotting this need, dealers would repurchase these prepaid vouchers at a discount.

Dealer: “Look, if you don’t need the entire Rs 4,300 worth of vouchers, I’ll buy some of them back.”

Customer: “I just need Rs 1,000 of talk time. Can I return Rs 3,300 worth of vouchers and take Rs 3,300 from you?”

Dealer: “I’ll take Rs 3,300 worth of vouchers, but I’ll pay you only Rs 3,000.”

Customer: “Well, I’m effectively paying Rs 1,300 for a mobile phone plus Rs 1,000 worth of talk time. Sounds good!”

The dealer now has Rs 3,300 worth of vouchers. So he doesn’t go back to Reliance to restock. When regular prepaid customers come in for prepaid vouchers, he’d offer some from the repurchased stock. The customer benefits (lower cash payment), the dealer benefits (higher margins), and it’s only Reliance left wondering why the sales dropped.

  1. Anonymous says:

    amazing case studies..keep it coming! & thank you!!

  2. Madhu says:

    neat case study. How did they solve it? Funny, because people always thing Reliance would fool the customer in most cases, nice to see a vice versa

  3. ritzkini says:

    =)) good one !! the ingeneous indian,so streetsmart !

  4. ritzkini says:

    kar lee duniya mutthi mein…

  5. harish says:

    odd they wanted to give away 3 years supply of exchangeable vouchers for prepaid customers. they should have thought this would happen

  6. S Anand says:

    The vouchers aren’t exchangeable, actually. The dealer is doing this behind Reliance’s back.

  7. harish says:

    ince there is nothing that prevents the dealer from doing so 🙂 you can have automatic topup into the phone on customer sending a msg. hehe of all companies reliance should know where to look for loopholes

  8. harish says:

    hey anand- as i scroll down this page,from the post dated 21 dec, the last few posts have some parts missing from the screen. wonder if its just my browser

  9. S Anand says:

    I’m having the same issue! Will look into it.

  10. Shreyas says:

    Wonderful case study! I guess the 4300 figure was a bit too high! May be a revision to arrive at the optimal point could have helped! But did Reliance actually lose out financially? Or did only their sales dip?

  11. S Anand says:

    Not sure if they lost out overall on this project, but the sales of their prepaid cards DID dip.

  12. saurabh says:

    I didn’t understand the admin feasibility of dealer’s buying back some of the purchase time out of 4300. Normally the 4300 talk time would be assigned to that number the customer is purchasing. So how could the dealer split that talktime and resell. Anyway that is why Mintzberg says executives have to understand psychology.

  13. S Anand says:

    The talk time was in the form of unregistered talk-time coupons. They were the same that were bought on the open market. Probably an oversight by Reliance in the hurry to get the product out in the market.