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Lock-in Contracts

By TelcoApril, 2007May 21st, 20243 min read

Some interesting things are happening in the world that might be a step backward. In the US, ISPs are starting to lock customers in to 24 month contracts. In other developments, Orange in the UK have extended their contract periods on new handsets to 24 months.

It has been a feature of mobile phone markets to “give away” (i.e. subsidize) handsets over a contract period. It is also common here for pay TV. In either case, the contracts are “needed” to amortize the customer acquisition cost (handset, pay TV installation and/or STB) and also to ensure the customer does not churn away.

What I want to question is the value of lock-in contracts in preventing churn.

Contracts can have a few different impacts on the customers themselves, and their behaviour and perception of the vendor.

One thing they can do is lock in a rate and commitment to service over a period of time. However, in the telco and data worlds, prices trend down in the long term, so this is of little value to customers.

If a customer is unhappy, being in a contract can make them less happy – in addition to poor service, they are unable to leave without incurring a penalty, which is like rubbing salt into the wound. On the other hand, it they are happy (or not unhappy enough to want to do something), a contract can sometimes be a good thing. Firstly, they often get some “perceived value” (handsets, plasma screen, jelly beans) at the start of the contract period. Secondly, they may use the existence of the contract to deflect nasty telemarketers (“p*ss off, I’m in a contract”).

So to summarize, contracts:

  • have no (or negative) value for fixing rates
  • make unhappy customers more so
  • don’t necessarily make happy customers more sticky
  • carry a maintenance overhead

Perhaps this is why Vodafone dumped them (for a while) and promoted the “freedom” angle of no contracts. Certainly, a similar argument can and has been made against network-locking of handsets.

My view is that if you keep a customer happy, they will stay a customer. Unfortunately, that argument isn’t good enough for your bean counters to allow you to spend $1000+ acquiring each one!

Are you able to quantify the benefits of customer contracts?

This was also posted at [Billing Bureau].

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