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How to Start a Cell Phone Store
Understanding the Business Model of the Cell Phone Industry
I personally like to talk about the business model right at the beginning of the page so you know how, and how much money you will make in the cell phone business. By doing so, you should understand what you're getting yourself into, and what to expect in this business. After reading the business model section, you can also decide for yourself if entering the cellular phone industry is the right decision for you or not. So here it is!
The cellular phone business works in a few ways. You make money by making the following sales to your customers:
New 1 or 2 Year Contract Activation (Post Paid Activation)
Feature Add (Add-On) or Contract Extension (Upgrade)
Prepaid Activation & Prepaid Card Sales
Accessory & Hardware Sales
Here is a list that summarizes how much money you can expect to make per activation as a cellular phone dealer for each sale that you make.
Post Paid Phone Activation (1 Year) - Single Line $75-150 per line
Post Paid Phone Activation (1 Year) - Family Plan $150-$300 per family
Post Paid Phone Activation (2 Year) - Single Line $75-250 per line
Post Paid Phone Activation (2 Year) - Family Plan $150-450 per family
Post Paid Upgrades (2 Year) $30-$100 per line
Feature Add $2-$100 per Feature Added
Prepaid PhoneHardware Sales $10-20 per phone
Prepaid Card Commission 7%-20% of Sale Amount ($20 Card is most popular)
Accessory Sales $5-$50 per Accessory Sold
As a word of advice, each dealers set their margins they way they like it. Many of the cell phone carrier owned direct stores have their prices set to hit the high end of the figures above. In contrast, some of the very price oriented independent dealers set their prices with the margin on the lower end of the figures above. You will need to decide where you want to set your margins, and how service vs. price will help you set up your pricing at your business.
There's Money to Be Made in Cell Phones!
New Post Paid Activations (Contract Activations)
Post paid activations are the same thing as contract activations. It is what many of us are used to when we think about activating and getting a cell phone. It will require you to sign a 1 year or a 2 year contract upfront. You are locked in to a given carrier during this time, and if you cancel before your contract is up, you will be hit with an early termination charge that ranges from $175-$250 per line.
In this type of activation, you can expect anywhere from $75-$250 per activation. This pertains only to "new" activations or "port" activations. A port activation is an activation where you switch carrier the customer's carrier from one to another. By switching carriers, it is considered a new activation. New activations are the core of your business, and this is where you will make your money. New activations are what you will need to strive for in this business.
The carrier owned stores that you see out in your neighborhood typically target about $200-$250 in profit per activation they sell. Many of the authorized dealers like ourselves usually are much more price competitive, and we typically target anywhere between $75 -$150 in profit per activation.
Normally, a small dealer will do about 15-50 activations per month, while the busy stores can easily get 50 or more activations each month. The level of profit does depend on four factors that will be discussed in further detail a bit later. But for your reference, the four factors that change the commission amount are:
- Price plan you contract the customer at
- Price of phone that you sell to your customer
- Contract period (1 or 2 Years)
- Any features added to the contract
In addition, each carrier will set a different commission amount for a new activation. This will be a critical factor in determining your profit as well. And in many cases, the commission amounts are tiered, meaning that a certain number of activation, for example 15 activations or more will yield you a higher commission amount.
It is also worth noting again that the commission amounts listed above is only for new contract activation or port activation. If you merely extend a customer's contract, your commission will be much less, as talked about in the next section. Lastly, in this business you will need volume to succeed. So be ready make many sales, at least 15-50 new activation sales, each month to succeed as a wireless dealer.
Below is an example of a commission matrix that the Master Dealer will provide you with. These are the actual figures at the time of writing in the year 2008, and you can expect to make this much doing business with a given carrier. Please understand that all carriers do not provide commissions at the same levels, so be sure to shop around and compare commission structures between carriers.
As you can see above there is a pretty large commission difference between 1 year and 2 year contract plans. In addition, Family Plans have great commissions, but keep in mind that only the first two lines get the commission. Any lines added from that point on, you get paid on the "Added Lines" portion. This master dealer does require a minimum number of activation and it ranges from 15-20 activations per month. Without that number, you will not get paid the Spiff portion. It is easy to see that dealers scramble to hit at least the minimum required at the end of the month to obtain the Spiff.
Upgrades (Contract Extensions)
Upgrades or contract extensions are another way of making some money in the cellular phone business. Upgrade happens when a customer has a given carrier, and they want to extend their contracts for another 2 years in exchange for a new phone on the same carrier.
Upgrades are usually 2 year contract extensions with the same carrier, and a customer often times becomes eligible for an upgrade 2 months prior to the contract end date. Please take caution that carriers will not pay you a commission for a one year upgrade to their dealers. And for that reason, you are unable to offer one year contract extension deals to your customers.
The profit margin on an upgrade is usually much less than a new activation. You can expect to make somewhere between $30-$100 per upgrade activation.
Upgrades are usually a pretty difficult sale for us authorized dealers, and we are always better off offering our customers to port their numbers to another carrier instead. Should the customer insist on an upgrade, you must understand and acknowledge that the commission amount will not be as high as a contract activation. You will then need to choose between making a low profit margin or to increase your profit by up selling to your customer. Many authorized dealers upgrade their customers by adding in internet, text message, or BlackBerry features to compensate for the lower profit margin.
Upgrades will not be a big money maker in your business, but you must provide your customers with great deals and great service doing upgrades to earn your word-of-mouth referrals.
Post Paid and Upgrade Business Process
The business process involved in selling a post paid phone and upgrades are a bit unique to this industry, so we would like to cover its details here. The transaction involves numerous parties and you must understand this for cash flow reasons as well as to do business as a wireless dealer effectively.
Basically, there are 3 processes involved in the cellular phone business to activate a phone.
Step 1: You must first purchase your inventory from your master dealer or an unlocked phone supplier. Inventory will usually run anywhere from $75 for a low end phone to over $500 for a high end Smart Phone. In some cases, you may need to buy SIM cards if you offer GSM phones, but usually, that will be included with the phones you purchase from your master dealer. For the unlocked phones, you will need to purchase SIM card only from your master dealer for about $15 a card.
Step 2: You will then sell to a customer for a new activation or an upgrade. The price of the phone will be subsidized by you because you will receive commission on that activation from your carrier. For example, say you bought a phone for $130 wholesale. For a one year activation on a $39.99 plan, you will get $245 in commission. That means you can subsidize the phone to make the sale. If you sold it for free, this will be your end calculation.
- Sale Price to the Customer $0 (FREE)
- Commission by Carrier $245.00
- less Inventory Cost $130.00
- Profit Margin $115.00 per line
If you sold it for $30 because there is a $30 rebate for the customer, this will be your profit margin:
- Sale Price to the Customer $30.00
- Commission by Carrier $245.00
- less Inventory Cost $130.00
- Profit Margin $145.00 per line
In the second example, the total price for the customer will be "Free after rebate." Just in case, this is why:
- Amount Paid by Customer $30.00
- Rebate Received $30.00
- Final Price $0.00 FREE AFTER REBATE!
Step 3: Collect your commission from your carrier or your master dealer (master dealers will be explained very soon). Usually, the carrier or the master dealer will ask you to submit a batch sheet that includes information on all of the activations you did for the month. Depending on the master dealer, they may pay you promptly in 2 weeks, or they may be very slow, paying you 60 days later.
Feature Add (Add-Ons)
Feature adds occur when you assist a customer add on a feature package like a text message package, BlackBerry package, or an Internet package onto their existing phone plans. It can also be used as an up sell mechanism during your new or upgrade activations as well. All carriers will give you commission for assisting your customers to add a feature package onto their existing plans. Commissions for add-ons usually range between $5-100 depending on the feature you add for your customers.
It is worth noting that each carrier does have priorities when they decide on how much commission to pay you for a feature you add for your customer. For example, one carrier may pay you $10 to add a $5 text message package, while another carrier may give you $30. Sometimes a carrier may come up with a new promotional feature plan that they want to really sell to the public, and may give you a big commission to accomplish their objectives. We've seen situations where a carrier would pay $100 commission on a $10 feature.
Adding features, if you do it right, can very well supplement your profit margins. You can look for somewhere between $5-$100 in additional commissions just by helping the customers figure out what deals are best for them.
Here is an example of what would happen to your profits when you effectively sell features to your customers:
- Sale Price to the Customer $30.00
- Commission by Carrier $245.00
- less Inventory Cost $130.00
- Profit Margin before Feature Add $145.00
- Feature Add: Text Message $10.00
- Feature Add: Internet Package $100.00
- Total Profit Margin $255.00 per Line
One last point to make with regards to feature adds is that a carrier will not pay a commission for any insurance packages added to the customer in case of lost or stolen phones. Many customers feel the insurance packages as an up sell, but it is actually out of courtesy for the dealers to offer it to you.
Prepaid Activations and Recharge
For many reasons, prepaid phones are becoming very popular in the cellular phone business. Prepaid phones are popular to these markets:
- A person that does not want to commit to a contract
- A person that does not have good credit
- A person who just immigrated to this country
- A person that use their phone for emergency or very minimal purposes
Prepaid phone sales are not exactly a huge money maker in this business, but you will need to offer it to your customers.
Prepaid phone sales involve two dimensions:
- prepaid phone hardware sales, and
- prepaid card or airtime sales.
The business model of the prepaid phone hardware sales is that you make money on the amount you mark up you pass on to the customer from the wholesale price. Hence, if you bought your prepaid phone at $25 wholesale, and mark it up $15 to sell it for $40 to the customer, the mark up portion of $15 will be your profit.
When selling prepaid phones, you'll likely notice that the price of the hardware is significantly cheaper compared to its post paid counterpart. You can expect to pay $20-100 for a prepaid phone device wholesale, whereas the postpaid phone devices will cost about $100-500 per device. This is due to the fact that the prepaid phone devices are subsidized by prepaid phone carriers so you and the customer can buy the phones at a discount compared to regular postpaid phones. This fact makes it very easy to maintain your inventory levels without significantly considering its cash flow issues.
The business model of the prepaid air card sale works on a commission scale. The commission can range from 5% to 20% of the price of the card you sell. The commission percentage will depend on the prepaid carrier. This means if a prepaid carrier pays 12% commission and you sell a $20 card, you make $2.40 per card you sell. An average commission on a prepaid card is usually 7-12%. One you develop a steady client base, it's very easy to see recharge card sales of $10,000 each month at your store.
The prepaid air card business is similar to having a residual commission each month. And again this business is about volume and increasing your customer base. In addition, it is also critical for the customer to purchase the prepaid recharge card from you as well. For some popular prepaid carriers, they do have the ability to purchase it online or at a local supermarket. If they purchase the additional recharge cards from a different source, you do lose out on your commission. Make sure you make a system to give your customers an incentive to purchase the card from you. You can use price discounts, online systems, or phone systems that will allow your customers to purchase from you instead.
Selling wireless accessories, such as cases, chargers, and hands free headsets are another way to make money for your cellular phone business. The mark ups for accessories are usually very high and it is normal to see something selling for $12.00 when the wholesale price was only about $0.50. Due to its low wholesale price of accessories, many dealers also package up accessories with a phone sale to make the deal more enticing for their customers. For example, "Free Blue Tooth Headset & Car Charger with each New Activation!" is a pitch you see very frequently. The cost involved in you offering this kind of sale compared to the value perceived by the customer is very well worth your efforts.
If you are a busy store, and good at merchandising products, accessory sales can easily bring in a good portion of profits for your business. Depending on the product, you can expect to earn $10-50 per accessory sold. And many people these days need a case, car charger, and a Bluetooth headset. So make your best effort in making accessory sales a big part of your cellular phone business.
Final Words on the Business Model
The cell phone business is a volume based business. And simply put, the people who make the most money are the ones who make the most sales. And these sales must be new activations or a port to make any kind of real money. This business relies a lot on heavy marketing and sales in order to succeed. We have seen that the best stores are the ones that advertise aggressively, has a niche market that they work with, and are very good at retail sales.
As with any business, having a niche market will help you tremendously to succeed in this business. We have seen many people succeed in this business, and they come from all walks of life. We've seen a lot of specific ethnic group dealers, such as Latino and Asian dealers succeed very well due to the continuous flow of new immigrants coming into the United States. We've also seen dealers that specialize in small businesses succeed very well. And we are sure that other markets such as the children market, senior market, the Smart Phone market, and other untapped markets are huge potentials in this business as well. We are always amazed to see dealers driving off on their new BMW from the warehouse to pick up their phones.
We also wish you the best with this business!
The Master Dealer
In this section, we will go over the details about the Master Dealer. The Master Dealer will be your entry point into stating out a business in the cellular phone industry. Be sure to understand their role and how you will be working with them in the near future.
In the past, dealers were able to enter into the cellular phone business by working directly with a cellular phone carrier. But today, the most common and easiest way of entering the cellular phone business is through a Master Dealer. Master Dealers are used by the major carriers because the big carriers do not want to allocate a lot of their resources into serving smaller dealers like ourselves. Since each of the carriers also have a direct retail channel (carrier owned stores) to take care of, they figure using a Master Dealer to satisfy the local demands are much more efficient then dealing with it themselves.
So with this in mind, we recommend you start things off with a Master Dealer to get your operations running fast and efficiently. Master dealers will be very fair with you, and usually many Master Dealers will allow you to start off with just one phone or very minimal inventory. Master Dealers are often locally operated if you live in a major metropolitan area, so that you can go to pick up your inventory with a 10-20 minute drive to their warehouse.
What does a Master Dealer do?
Simply put, Master dealers can get you partnered up with a cellular phone carrier. Master dealers will be your partner, commission processor, customer service expert, and a good friend. They will provide you with the collaterals (posters, brochures, paper contracts). They are the supplier of your cell phone inventory. They will provide you with the activation system. They will pay your commissions. And they will give you basic training and support to get your business up and running.
Basically, they will be your bridge to the big cell phone carriers. And they are there to help you succeed. Master dealers get paid on each of the activations that you produce for them. So they will treat you well, and help you out as much as possible to create the sales for you and for them.
Master Dealers come in all size and shapes. Some can operate very locally, while others can operate across the United States. Some have only one cell phone carriers that they represent. Others may represent multiple carriers. Some are very small. Others have multiple warehouses and offices. Some pay well. Others do not pay as much. And some are easy to work with, while others can be difficult. It all depends.
Finding the Right Master Dealer
Master Dealer research and actually finding the right Master Dealer for you is probably one of the most important tasks when you are starting out. Choosing the right Master Dealer can make a huge difference on how you operate, and how efficiently you do business.
However, finding a Master Dealer is usually not an easy task. The list of Master Dealers around the country is highly confidential and not available readily. And for this reason, actually finding the right Master Dealer for you can be a pretty difficult job. In many cases, you may just have to use the first Master Dealer that you encounter due to the lack of alternatives.
Since the wholesale list is highly confidential, please contact me for the list so that I maybe able to help out.
Once you obtain the contact information, start contacting them by email and phone. Many Master Dealers have a web form that you fill out on their websites. Set up an appointment to meet and talk to them. Since you will be dealing with them on many issues of your business, we suggest you talk, negotiate, and compare a few Master Dealers in order to find the right one for you.
During the initial contact stages of the Master Dealer, patience is a nice thing to have. Some Master Dealers may take time to respond to you. It is recommended that if you don't hear from them quickly enough, you contact them a few times to get a response from them. Some Master Dealers may not be interested in doing business with you since you are new to the business. You will need to have a solid business plan to overcome any objections that the Master Dealer may have, and persuade them that you are serious about this business.
Finding a Master Dealer and persuading them to work with you can be a challenging task when you are starting out. You'll need to overcome this challenge by preparing for the meeting by having a solid business plan. By persuading that you can make money for them, they would want to do business with you. Do your due diligence to find as much information about them as possible to make the meeting effective.
When you work with a Master Dealer, it is just like a marriage. You'll be dealing with them frequently on a variety of issues that will come up. It can also be tough to move from one Master Dealer to another, so be sure you take your time to find the "right one" from the start.
The next section will have points of consideration for you prior to contracting with a Master Dealer. However, before going into the next section, let's briefly touch on the role of an account manager.
The Account Manager
When working with a master dealer, you will usually have an account manager who will handle most of your needs. The account manager is a designated person intended to serve you and your needs. You can get their help in almost anything from training, receiving marketing materials, resolving customer service related issues, and answering any technical questions you may have. The account managers will become your semi-partner, so be sure you treat them well, since they will be the contact person for any problems you have.
When you meet your account manager, see if you are on the same wavelength with them. You want to be comfortable with your account manager because you will be working with them a lot. Your account manager is the contact person for most of your issues. You want somebody that you get along with.
Before Contracting with a Master Dealer
Now that you know what an account manager is, let's go over the preparation you should go before contracting with a Master Dealer.
Finding a Master Dealer that's right for you depends on a few points. For us, location did play a key role. We wanted a Master Dealer that was locally operating so that we can go get our inventory whenever we wanted. Luckily we were able to find Master Dealers that were only about 10-20 minutes away from our office. This played a key role in keeping lower levels of inventory at our stores.
Another concern when selecting your Master Dealer will be customer service. You'll need to look for signs that will indicate the level of your Master Dealer's customer service. Look to see if they are well staffed to help you when there is an issue with you or your customers. Also, look to see if they have a good website so that you can self service your needs on a variety of minor issues. Assess their level of customer service for you and your customers.
Obviously, commission is one key aspect that you must look into when selecting your Master Dealer. Since most of the commission is decided by the actual carrier, commissions between established Master Dealers are usually very comparable. The two points that decide the profits for you are the actual commission payout and the handset prices set by the Master Dealer.
Established Master Dealers are very competitive towards each other. In some cases though, there are Master Dealers that offer significantly lower commissions or that their handsets are significantly more expensive. These tend to be Master Dealers that are smaller in size and are not established. Or it can be Master Dealers that are not doing very well. The Master Dealer business is a volume based business, so if they are not doing the volume necessary to make money on their own, they will usually pass on the costs to you. So be sure to check out and compare a few Master Dealers, and the average commission of the carrier of your choice.
Now the last thing that will help you to narrow down your Master Dealer selection is the carrier you would want to offer to your customers. Master Dealer usually represents only one or two carriers, so even if you like the Master Dealer, you may not be able to work with them if they do not offer a carrier that you want to sell.
Points to Consider
Here are some areas of consideration and questions you should ask a Master Dealer before you sign a contract with them.
- How much commission does the Master Dealer pay?
- Are there tiers (Example: 15+ activations) involved to get paid a certain amount?
- What kinds of Spiff (Extra commission) are they offering?
- Are they competitive compared to other master dealers?
- What are some of the processes you need to go through to collect your commission from the Master Dealer?
- How fast do they pay their commission?
- Is the wholesale price of the phones subsidized?
- How competitive are the wholesale price of the phones?
- Do they allow the activations of unlocked or import phones?
- How often do they pay?
- Some Master Dealers will process your commission every two weeks while others will make you wait 60 days.
- How prompt are they to pay?
- Do they have a good system to pay all of my commission in time?
- Is the warehouse close to my store?
- How well stocked are they at the warehouse?
- What kinds of phones do they stock at the warehouse?
- Do they stock unlocked phones?
- Do they allow for "Will Call" pickups?
- How fast do they ship the phones?
- What are the shipping costs?
- Do they offer any incentives to lower the shipping costs?
- What are the people that work at the warehouse like?
- Does the hour of operation of the warehouse work out for me?
- How many people work at the warehouse?
- How often do they close the warehouse during holidays?
Inventory Purchase Requirements and Payment Policies
- Do they have a minimum order of phones that we have to order?
- Would they let me buy on credit?
- Do they accept business checks?
- Do they accept credit cards?
- Are they cash only? Return Policies (RMA)
- What are some of their return policies?
- Is the RMA system easy?
- How fast do they respond to an RMA request?
- How well do they communicate the approval or the disapproval of the RMA process?
Online Activation Tools
- Will they provide me with an online activation tool?
- Do I have to call in each time there is an activation?
- How easy is the online activation tool to use?
How Local Are They?
- Is the Master Dealer close to where I do business?
- Can I reach them quickly?
- Is it too burdensome for my account manager to come visit me?
- Is it too burdensome for me to go meet up with any of the account managers?
- Would the distance between me and the Master Dealer affect my business in any way?
- Would it delay the time it takes me to get a phone order from them?
- Would it delay the time it takes for me to get paid my commission?
- Would it delay the time it takes for me to resolve a dispute?
Account Manager and Master Dealer Connection
- What types of people work at the Master Dealer?
- Can I work well with them?
- How cool is my account manager?
- Can I get along with him or her?
- What tools can the Account Manager give me to expand my business?
- How active is my account manager?
- Does he respond to my emails or calls quickly?
- Does he look too busy to respond to me?
How to Get Approved by the Carrier and the Master Dealer
As much as you will screen which Master Dealer you want to do business with, Master Dealers will also judge you in your ability to provide them with a solid number of activations each month. Master dealers and carriers look for the following characteristics when getting stated with them.
Experience is weighed relatively high when a Master Dealer considers you to work with them. The experience will be good if you have any prior experience in selling cellular phones, or if you've been in sales and marketing in the past. As mentioned, this business has a very heavy marketing and sales aspect to it, so without that experience, you may not be able to offer the solid figures that the Master Dealers and the carriers expect. They will usually want to see at least 15-30 new activations each month. This doesn't have to happen in your first month, but within 3-6 months.
Location is also a very critical factor in deciding to grant you the privilege to represent a given carrier or not. For one thing, you may not have a retail store that you can operate out of. This may hinder your ability to get approved by a Master Dealer. However, as long as you have a solid business plan, you can get approved with a Master Dealer without having an office location as long as you can do some negotiating, and persuade your Master Dealer.
Locations that already have a high number of indirect dealers or carrier owned stores nearby may also hinder the likelihood of getting approved by the Master Dealer. It is not the Master Dealer's best intention to make the sub-dealers compete against each other because that will hinder everybody's profits.
The business plan usually needs to be submitted to the Master Dealers and the carriers to get approved as well. The business plan needs to specify out what your targets are, and how you expect to obtain consistent activations on a monthly basis. Again they look for 15-30 minimum, and prefer plans that grow to attain 50-100 activations per month. Refer to the business plan section of this guide, and answer the questions that is laid out for yourself.
Indirect dealers are sometimes referred to as Value-Added Resellers where you are able to exploit markets that are currently being underserved by a given carrier. These market maybe anything from specific nationalities, small businesses, or a specialized market. It is basically your niche, and the carriers tend to approve stores that can exploit a market that they are unable to reach.
Something to Watch Out For: Carrier Power
The last thing we want to touch on is about the power of the big cell phone carriers have on us.
The big carriers, when working with an indirect dealer like ourselves, constantly have conflicts of interests. The carriers own many direct retail stores to sell their services directly to customers. So on a store-level, your store can actually become a direct competition to the carrier owned retail stores even if you offer the same carrier's service.
This story becomes even more complicated since indirect dealers have the ability to offer lower prices than the carrier owned stores because it is independently owned. It may be located in a location that is lower in rent with fewer employees. In addition, since the indirect dealers frequently promote churn or porting over to other carriers due to the profit incentive, it can be very problematic for the carriers to work well with its indirect dealers.
With this conflict of interest in place, carriers can use its "big business" power to leverage the relationship with its indirect dealers. Recent developments in the industry are for carriers to ask for indirect dealers to sign an exclusive contract, offering only their brand at your store. This does eliminate the churn issue that they have with indirect dealers, but it does become disadvantageous for us because we are unable to offer selection to our customers. It will become your judgment call to see if you want to operate your business with only one carrier or not.
Another issue that you will see when working with carriers is its ability to control your commission. Usually, if you are operating your store without an exclusive contract, the carriers can decide to cut you off very quickly. They have the ability to reduce commissions by 50% or more at a very rapid pace, usually within 1-2 months. When you see your commission drop by that much, you lose your ability to make any money or you must increase your prices dramatically to your customers in a very short period of time. These actions by the carriers will usually prompt you to drop them and promote another carrier instead of offering what you were used to. We have seen businesses that go out of business when the big carriers take this action.
Our word of advice we have is to always to stay cautious when working with big carriers. If you do not go the exclusive route, you should always have a backup plan if the carriers do decide to cut you off. We recommend always having at least two major carriers you can offer to your customers at any given time.