This October, I hung out with my cousin, a serial entrepreneur who runs multiple franchises of a popular network provider. This was an amazing, tiring experience for me.

Carrier providers have this excellent strategy of bundling services to make customers stick with them for a long time. The network availability and the data speed are all the same for most carriers, but the challenge in these markets is to acquire and retain customers. They have multiple strategies to do this. They often have a subsidized prepaid mobile network company offering plans cheaper than the primary company’s prepaid and postpaid plans but with network deprioritization. Most international students and tourists opt for this plan. T-Mobile owns Mint Mobile ( It’s partly owned by Deadpool. No kidding.) and Metro PCS. Boost uses AT&T’s network. Verizon owns Visible. To reduce costs on postpaid plans, they offer bundling services like Netflix, Disney+, Max and other streaming services at a lower cost. They also offer Apple One, Google One, and Amazon Prime subscriptions, with insurance and whatnot.

One of their excellent strategies is offering you the latest iPhone for almost free (at least they make it seem like that, xD) if you are open to signing up for a contract. Now, the best part is that they know how to profit from this deal. They will somehow find a way to make you pay for that, and you won’t notice. And that’s fine because you’re paying what you were told and getting the latest iPhone for free the same month it was launched. You’re happy. The CAPEX is high, but the LTV is higher. I loved the customer acquisition strategy and the way they managed to upsell and cross-sell.

The Strategy

To understand why this strategy works, let’s break it down into a few key components:

1. Bundling with Contracts: Carrier providers often bundle the latest devices (phones, tablets, and watches) with long-term contracts. For example, they might offer the latest iPhone 16 Pro, which retails at $999, with a monthly mobile plan if you sign up for 24–36 months and trade in an old device. Verizon, in their latest promotion, is offering an iPad for free if you decide to get a new iPhone 16 Pro, and that too with a trade-in. They now get to charge a service fee of $9-$10 for the cellular iPad that they got you for free.

2. Customer Acquisition Cost (CAC): Large carriers usually buy flagship devices at a wholesale discount (10–30% below retail), meaning a $999 iPhone 16 Pro might cost them around $700-$900. The iPad and Apple Watch cost around $300–$500. Factoring in trade-in credits for old devices (worth $100-$200), the effective CAC for acquiring a customer can be as low as $600-$700.

3. Lifetime Value (LTV): Now, if you’re on a single-user plan at $80-$90 per month, the carrier stands to earn between $2,400 and $3,600 over 24–36 months. Even with a CAC of $600, the Lifetime Value to Customer Acquisition Cost (LTV/CAC) ratio is about 4-5. The profit margin is amazing.

4. Premium Plan Options and Discounts: Higher-tier plans make the numbers even better. Suppose you choose an “ultimate” plan with an $80 monthly fee, inclusive of all features, and the carrier offsets your phone cost to $0. It might seem more profitable for you, but they’re still making between $2,400 and $3,600 over the contract term, even after factoring in the phone cost and trade-in credit. The LTV/CAC remains strong at around 4-5.

5. Family Plans and Additional Add-ons: Here’s the best part. You might think that $90-$100 per line sounds high, so carriers encourage adding family members to reduce the per-line cost. Adding four to five family members drops each line’s cost to around $40-$50. Additionally, bundling home internet can reduce the cost per line to $30–$40 while still charging around $50-$60 for home internet. The LTV/CAC ratio increases. The profits increase 4–5 times.

6. Getting Out: The carriers have a way of making you pay for the “free” phone. If you decide to leave the contract early, you’ll have to pay the remaining balance on the phone, which can be as high as $500-$700. This is how they make sure you stay with them for the entire contract term—for the entire 24–36 months. They do not mention that they will keep the phone carrier locked forever, but if you try to unlock it before your phone payment is done, you will have to pay the remaining balance. Even if you decide the entirety of the amount of the phone after the “trade-in” value, say $10-$20*$36 = $360-$720, the phone technically still comes under finance, and you will have to pay the remaining balance if you want to unlock it and use a different carrier.

This model shows the incredible profit margins achieved through scale. Each customer pays a premium, and the more lines or add-ons they include, the higher the LTV per account. By the time all incentives and promotions are factored in, the carriers are making substantial returns on these seemingly generous offers. The EBITDA margins come in at around 35–42%.

For Q3, 2024, Verizon reported an EBITDA of approximately $12.3 billion. AT&T recorded an EBITDA of about $10.8 billion, and T-Mobile had an EBITDA of around $7.22 billion.^[1]

History

Case studies of Verizon show that the strategy has been working for them.

Established as the oldest carrier in the United States, Verizon has built an extensive customer base with accounts spanning decades. With origins tracing back to before 2000, its historical presence has cemented it as a household name synonymous with reliability and quality. It is more than getting a phone and a plan now. Verizon has now become a status symbol, and people are willing to pay a premium for its services- the best coverage and the fastest data speeds.

The historical aspect of a brand can significantly influence customer loyalty, a fact that Verizon capitalizes on effectively. A 20-30-year-old customer with an account in Verizon would not want to switch to other carriers. They are in a comfort zone now. To bolster this loyalty, Verizon offers targeted incentives such as loyalty discounts and exclusive offers like offering a phone for less than what it does offer to others, ensuring that long-term customers feel valued and are less inclined to switch.

These long-term customers often hold family accounts including multiple lines, devices, and additional services. Verizon strategically integrates home internet and TV services as part of comprehensive bundles, further strengthening the stickiness of its offerings. Such bundles create higher LTV. The LTV/CAC ratio for these accounts is around 6-7. The profit margins from these clients are insane.

Potential Downsides

As with any business model, there are potential downsides to this strategy:

• Churn Rate: Customers might leave after the contract term, especially if they find a better deal elsewhere. The carriers have to keep innovating to retain customers and attract new ones. This led to two strategies:

  • Phone Unlocking: Ensuring that customers feel free and not restricted by contracts.
  • Yearly Upgrades: Allowing customers to upgrade to the latest phone as soon as it is launched, trading in their old device at no additional cost.
    

  Competitors like AT&T and T-Mobile have refined customer retention strategies that differ from Verizon’s. Unlike Verizon, AT&T and T-Mobile do not unlock phones until the contract period is completed. Despite Verizon’s large customer base, it also has one of the highest churn rates. Given its legacy and status, Verizon cannot afford to appear as a carrier that enforces restrictive practices like phone-locking.

• Capital Expenditure (CAPEX): The initial investment in devices is significant. Carriers must ensure they recoup these costs over the duration of customer contracts. Additionally, they must manage inventory efficiently to keep the latest devices in stock, adding to the complexity of operations.

• Customer Service: The biggest challenge is customer service. With millions of customers, carriers strive to provide excellent customer service to retain customers. This includes handling complaints, technical issues, and billing queries. Most testimonials on the internet are about how bad the customer service is. People often complain about how they were charged for services they did not use, or how they were charged for services they did not know they were using. The carriers have to ensure they are transparent about their pricing and terms. A significant portion of their business is getting customers to pay for services and stuff that they probably are never going to use or need, like insurance, a hotspot, an international roaming plan, etc.

• Restocking Fees and Re-selling Issues: If a customer decides to return a phone, they must pay a restocking fee, which is often seen as a deterrent to returns. As of the time of writing, Verizon’s restocking fee is $50. If a phone is returned within a month, the carrier has to sell it as a refurbished device, reducing potential profit margins compared to new sales.

The competition

The telecom industry is fiercely competitive, with new players regularly entering the market. To maintain their position, carriers must continuously offer innovative services and competitive deals. Among the top three—Verizon, AT&T, and T-Mobile—Verizon stands as the most expensive provider but offers the best network coverage. AT&T follows as the second most costly carrier, known for its superior customer service. T-Mobile is the most affordable of the three and attracts customers with an array of perks. All of them provide the latest devices at competitive prices, with Verizon leading in terms of the number of devices offered. For instance, T-Mobile includes free international roaming in its plans, while AT&T offers free HBO Max, and Verizon provides the entire iPhone 15 series at no extra cost with a new line. After the launch of the iPhone 16 series, Verizon can acquire the iPhone 15 series at a reduced bulk cost while maintaining plan prices.

What’s Next?

All of these experiences gave me insane insights into what it takes to run a business, the differences between consumer and business products, and how to sell them. I’m still uncertain about how well these lessons will translate to tech, but I’m excited to try them out.