In our first article on the subject we touched upon the plethora of pre-paid products that were rolling into the marketplace. Many of these had easy to recognize applications; others require more "hand selling" as the application was not as clear at the consumer level. The pre-paid long distance calling card is certainly the most widely distributed product and most familiar to consumers.
Most everyone has purchased one of the thousands of available phone cards that make the claim of 1 or 1.9 cents per minute only to make a 2 minute call and see an apparent disproportionate amount of time removed from the card after the first call. Techniques such as 6 minute call rounding, daily maintenance fees and high connect fees and a host of other card drainers have left a bad taste in the mouths of consumers. These techniques were developed so that the distributors could extend 40-55% margins to retailers. The distributors are often referred to as "trunk salesmen" as they typically sold these prepaid cards for cash out of the trunks of their cars.
Although there are still millions of small retailers that continue to sell "live" cards (pre-paid inventory at the merchant level), their numbers are dwindling as more retailers become familiar with point-of-sale activation and the safety it provides for them. Retailers are also seeing decreasing margins on the LD products as government regulatory agencies and fierce competition has driven margins down.
Another market force has been the evolution of the clean phone card - a product that has full disclosure, has far less onerous fees and is geared towards repeat clientele as the products deliver what it advertises. These products have been coupled with major carriers such as AT&T;, Qwest, MCI and SBC in co-branding or a private label arrangement. The national brands also help instill consumer confidence which inspires trial and repeat purchase if the products deliver the quality that they claim (and most do). Recently we have seen the trend of merchants that operate better establishments utilizing point-of-sale
activation in conjunction with high quality LD products that deliver consistent quality with higher consumer satisfaction. This is in spite of the fact that the margins have drifted towards the 25-30% range, far short of the lofty 40 plus percentages they enjoyed just a few years earlier. One of the overriding concepts is that a better consumer product will lead to regular purchases at the merchant location.
The two clear winners as far as a secure distribution future in the pre-paid segment are of course the long distance calling card and pre-paid cellular. Our company has been distributing new phone handsets for ATT's Free 2Go™, Tracfone™, Cingular™ and T-Mobile™ in conjunction with less expensive refurbished handsets. Retailers enjoy the fact that the average consumer recharges their phone 1.7 times per month with an average PIN of $24.00. While the merchants are happy with the margins they earn on every transaction, the incremental consumer purchase from the other items in the merchant location is another big win. We are also starting to see merchant cross promotion based on cellular PIN sales; one check cashing location is giving away free money orders with every PIN purchased (a .99 cent savings at these particular units).
Another pre-paid product that is inherently one for regular and loyal purchases is pre-paid prescription drug benefits cards. For example, the Care Express products provide family prescription discounts at 45,000 retailers nationwide for only $9.95 a month. The other popular product that they offer today is a $49.95 card that offers these drug discounts, plus discounts up to 60% at 400,000 physician offices, thousands of hospitals, vision providers, chiropractors etc. With the millions of Americans that are both un-banked and lacking in medical coverage, these products should drive additional revenue on a regular basis to the merchant's door.
One of our favorite new programs is the pre-paid roadside assistance product. This point-of-sale activated product is reasonably priced at $9.95 for 60 days of coverage. After the initial 72 hour waiting period, consumers have access to nationwide coverage for tire changes, vehicle towing, free fuel delivery, tire change and jump start. Another interesting thing about the program is it covers the consumer in any auto as either a driver or passenger. Once again, we see enormous benefits to retailers that carry these unique and worthwhile consumer products because of the value and consumer base to which they speak.
While some of the products seem like a natural for a merchant to carry and an ISO to distribute, others are building their place in the market slowly and expensively. For now, it seems that music download cards are growing very slowly as pricing is consistent at .99 cents per song in many markets and music store retailers are fighting back with more aggressive compact disc pricing at the store level. The free file sharing pirate websites seem to still be out there with new ones popping up every month. This also feels like the kind of product that starts its life at the retailer's counter and then becomes a purchase via the Internet as opposed to the retailer's countertop.
Similar parallels can be drawn with the pre-paid Internet product as well. Surprisingly small by a sales barometer ($30 million in annual sales revenue in the U.S. in 2002) one would suspect that eventually more people will wise up to the fact that they are paying $23.90 a month for AOL yet they are only utilizing on average 3 hours a month. In a prepaid product context, this 3 hours per month has a cost basis of typically only $3.60. Again, this is a product that requires education at the merchant and consumer level with a great deal of hand selling (aside from expensive packaging). Many buyers of this product probably do not have a credit card for redundant billing and yet, there will also be business travelers who want on-the-road access that they may not find in the hotels that they travel to. Both of these consumers are great customers for the merchant as far as regularity may go, it's just going to take a while to inform all the parties concerned.
We'll be touching upon new and exciting pre-paid products in the coming months and will bring the sales opportunities and challenges to ISO's and their merchants. As with any product in the ISO portfolio of offerings, it is critical to match the service to the merchant and their audience. Candid and frank discussions, one-on-one, between the ISO and the merchant as it relates to the products, the state of the industry and the merchant's audience is critical so the ISO can under promise and over deliver. If expectations and products are properly managed, the proper pre-paid product set can deliver long term repeat clientele for merchant locations and strong ongoing revenues for both the ISO and the retailer.