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Would you stop that download if you knew you were about to exceed your plan?

How cellphone users and service providers react to overage

(photo by Merill College of Journalism via Flickr)

Cellphone alerts that tell us when we’re about to exceed our usage limits can help save us money on overage fees.

But when telecommunication companies introduce higher fixed fees to compensate for those lost revenues, we may not come out on top.

Those are among the key findings of a new study co-led by Matthew Osborne, an assistant professor of marketing and management at the University of Toronto Mississauga, who examined whether bill-shock warnings financially help or hurt consumers.

Specifically, Osborne and Michael Grubb, an economics professor at Boston College, evaluated detailed U.S. cellphone data from 2002 to 2004 to predict what effect the introduction of such warnings might have had on those consumers’ usage patterns and fee savings. The study was published in a recent issue of American Economic Review.

“Based on what we found, these alerts would generally work – they save people money, because when people get a warning, they reduce their usage quite significantly,” Osborne says. “But overage fees are a big source of income for telcos, so they try to make their money in other places.”

The data Osborne and Grubb studied featured the monthly billing records of university students enrolled in cellphone plans offered by a national U.S. cellular carrier. In looking at their usage patterns, the researchers found that about 20 per cent of users on plans ranging in price from $35 to $55 per month incurred overage fees of approximately $20 per month. They were able to extrapolate that, had bill-shock alerts been in effect at that time, each student would likely have saved about $103 per year.

At the same time, the researchers were able to infer from the data that such alerts may not be useful to all cellphone users, because many of them tend to underestimate how much they use their phones. Specifically, Osborne says, they are overconfident about their ability to avoid incurring overage fees, and so may not benefit from such a warning. He says consumers today are better able to estimate their number of calls and texts, but less able to keep tabs on their data usage.

“Data in some sense is harder to track. When we use our phone to download an image, we probably have no idea how many megabytes or gigabytes we’ve used,” Osborne says.

The researchers also tried to take into account the trend in recent of telcos raising their prices in order to offset lost overage revenue. They were able to predict that higher fixed monthly fees would have decreased the average annual savings per person by $33.

Osborne advises consumers wanting to better avoid overage fees to install a usage meter application on their phone. He also says government intervention that requires telcos to share more detailed information about their customers’ usage habits would be useful.

Says Osborne: “Any information companies can provide that will help you do a better job of predicting your bill would be helpful.”