Personal finance: Pre-pay is ringing the right bells

Pay-as-you-talk mobiles are already big in Europe and are catching on here, particularly with teenagers and new businesses.

Up until a year or two ago there was only one way to get a mobile phone. You bought a handset at a ridiculously subsidised price, and in return you signed a contract to say that you would stay with your chosen network for at least a year.

During this 12-month commitment, you paid a monthly fee for the basic service, and extra for additional calls. "Free" handsets enticed many customers - but others, quite rightly, could see there was a catch.

Pre-pay mobile phones, where you buy the phone outright and without having to sign any contract, are now revolutionising the process of getting connected. There is no commitment - if you find you don't use the phone, you are not contracted into making unwanted monthly payments. All calls are paid for in advance.

Initially, pre-pay packages were designed simply to appeal to those who could not pass the stringent credit checks undertaken on those signing a 12-month contract. The high cost of the handsets and high call charges put others off. But with all four network operators now offering pre- pay, the schemes have evolved so that they appeal to a far wider audience. Peak rate calls can cost as little as 25p a minute, and from 5p in the evenings and at weekends.

The price of the kits, which include a basic handset and your first few calls, have been forced down by the entry of the big supermarkets. It was Asda which threw down the gauntlet last month, by offering a Cellnet package for just pounds 69.99 - a pounds 30 reduction on the previous high street price, made possible by the supermarket cutting its profit margin on the package.

"We're launching the people's phone," said Asda's trading director, Mike Coupe, when the supermarket entered the arena at the end of October. "Our move will send a signal to the phone operators that it's time to ring the changes." His prediction proved right: within a week other networks had responded with similar price reductions.

Pre-pay packages are particularly appealing for those who just want a phone for emergency use, or for incoming calls. There is no monthly fee for line rental - all you need is to buy the occasional top-up voucher to ensure you stay connected. Cellnet's EasyLife kit wins here, allowing you to keep your handset ringing for just pounds 20 a year. Even those making an hour's worth of calls a day can find out that pre-pay packages can work out cheaper than a traditional contract agreement.

Pre-pay tariffs may not represent the ideal tariff for everyone - but the fact that you can buy them off the shelf without any fuss or paperwork has been the route of their success. They have also found approval in unexpected quarters: "They have proved particularly popular with start- up businesses and teenagers," says Ian Volans, a spokesman for One 2 One.

Recent price reductions follow similarly aggressive pricing or marketing of pre-pay in other European countries.

"In Italy, 9 per cent of the population have bought cellphones in the last year," explains Paul McAleese, Cellnet's head of consumer marketing. "And in Finland 95 per cent of 18 to 21-year-olds now own mobiles."

A disadvantage of pre-pay schemes is that the choice of phones is severely limited. Most of the handsets are large and offer few thrills. Furthermore, the number of services available to non-contract customers is also restricted.

"They are also a non-starter with corporate users," says McAleese "as there is no monthly bill."

Pre-pay is not the only way in which networks are enticing those who are worried about the cost of running a mobile. They are also spicing up contract tariffs. All-in-one kits, for instance, still require you to sign a contract, but by paying for your line rental in advance, the networks thank you with a substantial reduction in the first-year costs.

One 2 One's pounds 150 kit includes a basic handset, connection, and a year's subscription to a tariff which includes 45 minutes of calls a month - a saving of over pounds 100 on the usual price.

As networks try to appeal to more and more niche groups, and try to retain customers, the number of tariff options continues to go up. The myriad of price plans available means that it is even harder for users to be sure that they are getting the best deal.

Cellnet, for instance, has launched a new initiative where discounts are dependent on how long you have committed to the network, and on precisely which numbers you call. Uniquely, Cellnet allows you to sign a contract for just one month - but if you commit for longer you get lower call charges.

Those who sign up for five years get 15 per cent off. Imitating BT's Friends & Family scheme, Cellnet offers reductions of up to 50 per cent on calls made to 10 nominated numbers.

The confusion caused by such complex price plans has seen Orange introduce a value guarantee. Under the terms of this, users can opt for being charged by the price list of any of Orange's digital competitors.

The increasing complexity of the buying process may just be something we have to resign ourselves to. "By offering more choice and better value for money, the customer is bound to have more decisions to make," says Volans at One2One.

Chris George is a contributor to `What Cellphone' magazine