Stuck in a contract? Here’s why.

After my last blog post on telco contracts I thought I’d explore further the psychology of contracts and why they’re so common. In a nutshell, telcos use contracts because most of the time they don’t trust that their service delivery team will actually deliver the service that the salesman or brochure offers you.

Every business has sales costs. It’s well known that the cost of gaining a new customer is quite significant (paying for marketing, sales staff, accounting staff etc.). Almost every business growth seminar talks about the rationale that it’s smarter business to invest in keeping clients than the more expensive option of chasing down new ones.

In the early days of telco competition (after Telstra was forced to wholesale their phone services to other providers), it was common for customers to change from one provider to another to get a better deal on their phone calls as the cost of telco came down. This created some significant sales cost issues for the telcos involved, but there wasn’t much that could be done. However, mobile phones started to take off and it became common for providers to offer a free mobile handset and spread the cost of that handset over a period. So the “mobile plan” (think “mobile phone repayment option”) was born, locking customers into a term contract so that the telco could be assured that they would at least pay off that handset cost. This became quite accepted in the market.

It was then realised that the market would now accept these term contracts generally and that this could be used to limit some of these sales costs by forcing customers to stay with them until at least those sales costs had been recovered. The telcos started offering discounts in return for agreeing to some sort of term contract.

Fast forward 10 years and we enter the much more technically complicated world of the NBN and VoIP phone systems (phone calls over your data connection). The simple (and therefore reliable) copper phone connections were now not so reliable partly due to their complexity but mainly because the telcos lack the staff that fully understand it. Now, this same term contract had a very good side effect (for the telco!), it limited the opportunity for a client to leave for a reason such as the service not working as well as they’d been led to believe by the sales person. This is particularly true when the client had a solid and reliable copper service and has no reason to believe that the “same” service over the NBN will be any different.

Essentially there are four main reasons why a client would want to terminate a service from a telco:
1) They’re offered a better price by another telco and want to switch.
2) There’s a change in their circumstances (down size, move office etc).
3) The telco’s service is unreliable and/or doesn’t work the way the customer expected.
4) The telco provides a poor service (technical support, billing etc).

The telco probably has no control over the first two and I have some sympathy for them wanting to limit their costs associated with this by locking the client into a contract. However the last two are totally under the control of the telco and I pose that these days this is the major reason that customers want to terminate their service and find another provider. Anything the telco can do to limit this is very much to their advantage and to the disadvantage of the client.

To make matters worse (for the client), once the client is locked into a contract, the telcos have almost no incentive to provide a good service, they just have to provide a good enough service to stop the client going to the Telecommunications Industry Ombudsman (TIO). Providing a quality service costs money and in the highly price sensitive telco market (have you noticed how almost all telco advertising leads with the price), the temptation to cut corners is immense. To keep clients from going to the TIO, they train their staff to be empathetic and apologise a lot before promising some action which either doesn’t actually happen or makes no difference. Another tried and trusted method is to blame the NBN itself (“it’s not our fault”).

In no other industry are these contracts so common. In any other industry the provider of the product or service has to work hard to keep the client happy and continuing to purchase more of their product. Even the supermarket chains which aren’t exactly known for providing a quality, personal service, have to be customer focused (through their research and marketing), because they know that at any time you could switch your purchasing to another company.

When I setup Launtel, I was determined not to follow in this ridiculous process. I was determined to use “good, old fashioned service” (why is service “old fashioned”?) to keep our clients using us. This is why we never use contracts. Even when clients are offered a cheaper service, most of the time they choose to stick with us anyway because they like what we deliver.

Think about this…
Next time your pen is poised over a telco contract (or you have a call centre employee on the line asking you to record an “I agree”), just remember that by putting this contract in front of you, the telco is basically saying “we don’t trust that we will actually be able to provide the service you expect and we want to make sure you can’t leave if you don’t like it”. To put it another way, while most companies will end a statement by saying “… because we know you have a choice”, most telcos would say “… because we couldn’t survive if you really did have a choice”.

If enough is enough and you’re sick of being locked into a contract… consider Launtel as your new service provider. No Contracts and did we mention we offer the fastest home internet in Australia? Contact us. We’re at your call.