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.