Why Mandatory Service Contracts Are Bad For Business

Customer retention and loyalty is in the vocabulary of every company, and one of the main objectives of most. But it seems that entire industries, in particular telecoms for mobile phone service and cable and internet service providers, have a very misguided understanding of what customer retention means and instead insist on locking customers into lengthy contracts which effectively amounts to nothing more than customer detention.

While there are different strategies for customer retention throughout the customer experience lifecycle to prevent defection, generally it involves ensuring customer satisfaction by providing quality products and services. And the general idea of loyalty is that the customers are so satisfied with the quality of the products and services provided that they continue buying from the company. There is also a general belief that customers who are not only satisfied but also delighted will go beyond loyalty and become advocates, actively promoting the company.

Mandatory service contracts go fundamentally against this principle. The very proposition of these is that customers have to stay with the company regardless of satisfaction. While contract terms widely vary between companies who engage in this practice, one thing most have in common is the glaring absence of any promise or guarantee of satisfaction. In fact, they are more often than not a guarantee of poor service.

And it is not so much about the technical aspects of service such as coverage, poor signal and reception or dropped calls, but about the poor problem resolution, long wait for customer service, confusing bills and hidden fees, home installations or repair appointments not honored, which are all too common stories.

Mandatory service contracts may actually be the cause of poor customer experience. First, consumers want the freedom to decide. Consumers want to be able to try before committing and want the ability to opt-out. Just see the number of articles giving advice on how to break service contracts, such as this Wikihow entry.  There is something suspicious if a company insists in locking customers in a contract. And this sets the stage for the rest of the customer relationship; it predisposes customers to be more critical and less patient, because they are detained.

Secondly, mandatory service contracts may actually result in the company being less willing to provide good service and address customers’ issues promptly. After all, if they know customers can`t leave, they have that much less incentive to do so.

Companies who engage in this practice of mandatory service contracts enter a vicious circle. Customers distrust them and want service contracts even less, which motivates the companies to over-promise and use dubious sales tactics in order to get customers to sign up or renew their contracts. This also means increased acquisition costs.

While some do provide monthly payment or pay-as-you-go options (like pre-paid cell phone minutes), these are considerably more expensive compared to the contract rate. Why would the out-of-contract rates be so expensive? Because with contracts, the cost of customer acquisition is spread over a certain number of months, allowing decreasing rate over time.  This suggests these companies very well know customers are likely to defect because of poor service, so they simply pass on the cost of acquisition back to the customers in the first transaction. For the same reasons, fewer still provide trial or opt-out periods that would allow customers to judge of the quality of service before committing.

And with prices steadily falling, you can see another reason why these providers insist on locking customers at a fixed rate for a long time. Any way you put it, the plans are designed to squeeze the most out of the customers.

It’s not only a coincidence that telecoms and cable and Internet service providers are among the most passionately disliked companies of any industry. Verizon quickly scrapped their idea of charging customers a $2 “convenience charge” after an uproar that saw thousands of angry comments in social media. Nice try.

Incidentally these industries also consistently figure on top of the list of those that receive the most complaints with the Better Business Bureau (BBB) in the US and the equivalent in many other countries. They are also among the industries with the lowest average Net Promoter Score (NPS).

Mobile phone and cable and Internet service providers are not the only ones to engage is this practice. Many gyms for example force service contracts. And many request upfront payment. Unfair cancellation terms have led in some case to court rulings, as in 2011 Ashbourne gym case in the UK.

Breaking the mandatory service contract vicious circle would improve the overall customer experience across those industries as it would force providers to earn retention through satisfaction, rather than by robbing customers of their free will. In turn this would start a more virtuous circle of customer retention: satisfied customers become loyal, commit for longer periods and may actually become advocates, which in turn would decrease acquisition cost and allow yet more customer experience improvements.

It would take one new comer to emerge and provide an excellent customer experience, with clear and simple pricing schemes, without contract, to capture much of the market. Unfortunately in most markets these industries are run by monopolies and oligopolies that are not very willing to change, so customers don’t have much of a choice. Smaller players just cannot offer the same coverage, data speeds or price the large few can.

So it will take government regulations or a brave large provider to have a complete change in corporate philosophy and lead the way. Only then will the others follow suit and start trying to treat customers with some respect. But most customers will see their move as disingenuous and too late, giving the advantage to the first mover.  It may take a long time to happen. But I’ll gladly switch my service to the first provider who changes its definition of retention to a satisfaction-based one.