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.