Cash-strapped consumers switch to pay-as-you pricing model for mobile phones, cars, insurance and utilities

LONDON - Until recently, mobile pre-pay pricing deals have appealed mainly to adults with credit problems or no bank account, and children. However, as the economic climate worsens, consumers in other demographics are also beginning to turn to such propositions as they, too, find themselves short of cash.

Last week, Sony Ericsson's UK marketing manager Dave Hilton revealed that the handset manufacturer is dedicating more of its marketing budget to the pay-as-you-go (PAYG) market.

Mobile network Orange has followed suit by extending its 'animals' tariff packages to the pre-pay sector to target customers tempted by the flexibility of PAYG. 'We are seeing customers choose PAYG for its flexibility and control,' says Jeremy Morris, head of PAYG acquisitions at Orange. 'It is good for people who want to know exactly how much they are spending.'

Meanwhile, O2 customers can sign up for the network's 'Simplicity' flexi-contracts, which allow consumers to bypass the added cost of a handset up-grade, and change tariffs or even cancel their deal at any stage with only 30 days' notice, without incurring any extra costs. Vodafone runs a similar deal called SIM Only.

It is not only mobile phone companies that have spotted a growth in demand for PAYG. The concept is catching on in other sectors, where consumers are not willing to commit themselves to a 12-month contract. Gyms and leisure clubs, for example, are known for tying customers to lengthy deals, but Virgin Active is now allowing consumers to cancel with 30 days' notice at any stage in their contract.

Streetcar has based its entire business model on the pre-pay concept. The car-rental brand hires out vehicles starting at £3.95 an hour or £39.50 a day. Co-founder Andrew Valentine says that when times are hard, people look to do everything in the 'easiest and cheapest way they can'.

'People are having to be more careful with their money, and they are using this type of service more,' he adds. 'The length of rental is falling too - where people once rented a car for a day, they are now renting it for two to three hours.'

PAYG has also made inroads to the insurance market. AA Travel Insurance is running an outdoor campaign reminding holidaymakers that they can purchase cover for £5 a trip, as opposed to £32 for the year. Similarly, home-emergency insurance provider HomeServe has relaunched as a consumer brand offering 'Jobs on demand' for consumers who can't afford a full policy.

Despite having suspended its Pay-As-You-Drive insurance policy last week, Norwich Union says it is committed to the concept in the long term. It was introduced to help young drivers, who are often lumbered with costly premiums, by installing an in-vehicle device that records when and how far they drive.

Norwich Union spokesman Erik Nelson said the policy was successful, but as car manufacturers have not yet started to build these devices into models, it was a costly venture for the insurer. 'Average customer savings were about 30% and the retention rate was about 90%,' he says. 'We are saying the policy has "paused", because it will return.'

The utilities industry is closely tied to the pre-pay model. With its heritage in coin-activated meters, the sector is set to re-introduce the top-up system as an option for consumers, with 'smart meters' due for general release over the next couple of years.

Npower launched its first smart meter trials in the North East of England in August last year. The devices allow pre-payment via the internet or SMS, and can be read remotely, making them more convenient than the card or token PAYG schemes currently on offer.

However, Paul Gordon, managing director at marketing agency Tangible Financial, points out that PAYG has its limitations, and is unlikely to make a big impact on financial services.

'You can see PAYG in transactional services and grudge purchases, such as insurance,' he says. 'But it would be difficult to implement it in longer-term projects, especially those linked to the stock market's ups and downs.'

The biggest problem faced by brands is that PAYG has long been considered poor value. Companies can claim, with some justification, that charges reflect the higher costs of operating a PAYG service, but, ultimately, consumers may be hesitant to sacrifice the long-term savings offered by pay-monthly deals.

Data file: PAYG market

  • At the end of March 2008, Orange had 15.7m active mobile customers. More than 10m were on PAYG, and 5.7m on pay monthly.
  • O2 is the UK's biggest mobile network in the pre-pay sector. It had 11.4m PAYG customers in the first quarter of 2008, compared with 7m on pay-monthly.
  • Vodafone has a total of 18.4m consumer and enterprise customers; 60% of its consumer business is PAYG.
  • Vehicle rental brand Streetcar has more than 30,000 members, and 600 locations in six UK cities. Payments are taken by direct debit 24 hours after bookings.
  • Streetcar offers a VW Polo BM at £3.95 an hour, £39.50 a day and £165 a week. A VW Golf is more costly at £5.95 an hour, £49.50 a day and £195 a week.

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