Two year contract required

I’m a big fan of making money by selling services but a disturbing trend is the requirement that customers sign a one or two (or even three) year contract in order to sign up for a service. Such contracts will have a fat termination fee if you want to end the contract early.

This is almost universal for cell phones, and of course it makes some sense when they are selling/giving you a subsidized phone. They need to be sure you will stay with them long enough to make the subsidy (From $200 to $400 if you include dealer kickbacks) back. That’s not so hard, because with many people getting cell phone plans as high as $100/month, they make it back quickly.

However, cell phone companies notoriously require a new contract for just about any change in your calling plan, including simply switching to a new plan they just started offering that you like better. Usually that’s just a one year contract. This makes much less sense. Switching your plan doesn’t cost them anything much aside from a call to customer service. They just want to put you on that contract.

DSL ISPs (and not just the phone company ones) are also notorious here. Some need it to subsidize installation or equipment, but again it’s also done simply to change price plans. In many cases you will also see major discounts offered if you commit to a contract (or of course even better if you just pay 12 months at once.)

I understand the attraction of the company for contracts. They can predict and book revenue. Quantity discounts have always had their reasons.

But they may not realize a serious negative about the contracts. They are a barrier to getting customers. In particular, a demand for a contract (when there is no major subsidy) says to me we think that without a contract, we could lose you as a customer. We fear that, if not for the contract, you would leave us. And that immediately makes me think the same thing. “What is it that makes them think they can’t keep me just by providing good service at good prices?” They already won my business, which is the hardest part. Now all they have to do is keep me happy and they will be very likely to keep it.

This recently backfired for Verizon. I’ve been off contract with them for years, though I had often debated switching to a different plan. Every time they told me I would need to sign a one year contract, and get no subsidy for doing so. (For a 2 year contract, they would have subsidized a new phone, but I wasn’t ready to do that.) So when phones broke I often picked them up on eBay rather than take their 2 year subsidy.

When it came time to really want to change plans, their demand for a new contract made them the same as all their competitors, who will also demand a new contract. And thus there was no particular reason not to switch. They encouraged me to compare all the various offers, all of which require a new contract, and all of which can offer me a phone subsidy with a 2 year contract. And all of which can keep the number, thanks to hard-won number portability. Had they been willing to let me make changes without a contract, I would have had no incentive to go shopping around at the competition. There I learned about much better deals they had, and thus left Verizon.

Perhaps they think they need a contract to keep me from the competition. But truth is, that might work temporarily but it just delays things. When a contract expires, somebody is going to be ahead, be it the competition or be it them, and they just moved the switch in time and probably locked me into the competition for their efforts.

The best company in the business shouldn’t need a contract to hold me. If the competition is offering a snazzy new subsidized phone for a contract, then my no-contract company can certainly offer that. Or, ideally, just offer me a lower monthly rate if I bring my own phone, with no need for a contract — my choice.

Over time, the public might wake up to realize that the contract is much more expensive than the phone subsidy. A typical data phone requires a plan of $60 to $80 per month, and many are on plans of $100 or more. That’s a $2400 purchase at $100/month, all to get a $200 phone subsidy. Of course most customers plan to buy from somebody over the period, so it makes sense to take the subsidy if you aren’t likely to be changing all the time, which most of us aren’t. But I am curious why all the firms feel these contracts are really in their interest.

Update: I should point out that there are reasons to get warmer to a contract when getting a new phone. Typically there is a $200 subsidy on the phone, and sometimes much more. And quite commonly, the penalty for getting out of the contract is $200, and in fact my law reduces on a pro-rata basis as you move through the life of the contract. As such, there is no reason not to sign the contract if you want that brand-new phone. In addition, there are contract trading sites (where other people will take over your contract for less than the penalty price because they don’t need a phone) to get out even cheaper.

However, you don’t want a contract without this level of quid pro quo. A contract just to change plans is ridiculous. Some carriers are getting that message.

customer risk

I was recently talking about a veterinarian out here about the problems she was having getting some time off while still having someone to cover her patients, in this case various animals. She had tried setting up a coverage pool with other local vets, but most of them were terrified that if one of their regular patients went to another vet in an emergency, they might lose them as a customer. My friend figured that she was a good vet, so that she was just as likely, or perhaps even more likely, to gain a customer as to lose one by such a cross coverage scheme. Unfortunately, the other vets were less confident and unwilling to take the risk.

Interestingly, there is no problem here with human doctors. My eye doctor, GP, dentist and the like all have a network of other doctors to cover not quite emergency room level emergencies. They seem more confident in their ability to attract and retain patients.

The cell phone companies have a lousy product, and they know it. It's actually rather sad, sort of like Mad Magazine's behind the scenes at Brand X article. Hey, someone has to make those other products that just aren't quite as good. The only way they can imagine keeping a customer is to lock them in contractually. A good service provider would simply provide better service.

Two year contract required

Thanks for your insight on the pathology of contracts. I'd held the same 1yr contract with Verizon, since they were GTE, with only 2 models used. I switched from the walkie-talkie sized model to one the size of a cigarette box with no bells or whistles. I declined all the offers for change since, until 4mos ago, because I felt a big change with new technology coming in. It wasn't long before I got a letter from Verizon regarding that change and informing me that my current model wouldn't be compatible (go figure). So, I changed, and the contract is 2yrs. I wasn't unhappy with their services; I only needed basic, except for the new vCast, I quickly had it removed; what a rip for an extra $15/mo! Anyway, I was gifted a new iPhone last week and I'm wondering how to make the switch, as painlessly as possible, while keeping my current number, of course. Any ideas?

Rene'

Get out of contract

Well, if it’s under 30 days since you signed the Verizon contract you can still get out of it. Otherwise they will require you to pay an early termination fee of around $200.

There are web sites you can google for that tell you tricks to get out of contracts, some more ethical than others. One of the more ethical ways is probably http://www.celltradeusa.com/

When you sign up for AT&T on your iphone, be sure to use the trick I described earlier on the blog, which I don’t think is unethical. Namely first buy a subsidized phone like blackberry or treo, then switch that contract to iphone, and sell the subsidized phone for full price on ebay. Effectively moves the subsidy to your iphone.

Or there are tricks to get your iphone with no contract (enter bad SSN to fail credit check, they will offer you prepaid.)

Get Out of Contract

Many thanks!

2-year contracts vs. Prepaid lines

Brad, your blog is just terrific!
It's great the insight you made with the contracts. I have never signed a contract before, but I felt terrified already with the experiences some friends had with termination fees and other silly monthly charges. I found this webpage trying to get some advice from other users to get a plan without signing a 1 or 2-year contract with any company. I just don't like to surrender the freedom of choice and change. I have been used prepaid from T-Mobile To-Go so far, it works well but it's pretty pricey (around an additional 50-70% and there are no free wkds or nights).
Thanks again Brad for sharing this.

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