Mobile-telephone companies tend to consider prepaid service a poor cousin of monthly billed subscriptions, and it is true that prepaid customers generate, on average, only 35 percent of the revenue that monthly subscribers do. Some mobile operators even talk about getting out of the prepaid business altogether. Our research suggests, however, that prepaid customers, when managed properly, can offer a healthy revenue stream whether or not they eventually become monthly subscribers. We have found that when a carrier implements an effective acquisition program, it can increase the profitability of prepaid customers by 40 to 80 percent.

Unlike subscribers, who receive monthly statements, prepaid customers buy phones with a set number of minutes on embedded chips. Service is activated immediately. No credit account is required—an arrangement that attracts those who tend to be short of cash, have a bad credit history, or just don’t want to be surprised by large bills. In theory, the economics are quite attractive: the payback on investment can be relatively quick, since it costs less to acquire and activate accounts. One European operator recouped its investment in prepaid customers after just 9 months, for example, compared with 13 months for subscribers (Exhibit 1).

In practice,...