Why contracts are killing the telco business

Contracts engender loyalty - right? No, says Chief Analyst Teresa Cottam, contracts can actually harm the customer relationship.

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The Prisoner by Evelyn De Morgan


Having read yet another article by a respected analyst which urges CSPs to try to move prepaid customers to postpaid accounts in order to engender loyalty, I decided to tell you why I think this is wrong thinking.


The fact of the matter is, that pospaid relationships do not in themselves engender loyalty and in fact can kill the very foundations of loyalty - goodwill and trust. And here's why.


Loyalty does not arise out of contracts

Entrapping a customer on a two year contract does not engender loyalty. The dynamic of the long term postpaid contract can create some very unhealthy practices.


Firstly it allows the telco to neglect a customer since that customer cannot leave them without incurring a hefty penalty. They are pretty much imprisoned by the contract. Now if you married someone and then ignored them for two years believing that it was okay because they can't escape, there's a pretty high risk you'd get dumped and divorced. Why then do telcos believe it should be any different with customers?


"Just as a marriage needs working on - including constant effective communication, renegotiation, compromise, mutual understanding and the alignment of goals - so too does a customer relationship." Teresa Cottam


In fact telcos often believe they can afford to neglect their customers for months or years and focus their attention on the end-of-contract period and on attracting newly liberated customers from rivals. During the end of contract period they often use the wife beater's excuse of always having loved you even if they didn't always show it, while promising they have "seen the light" or "turned over a new leaf" when held to account.


What it also means is that even when it does exist, loyalty often isn't rewarded in telecoms, because the relationship between the customer and the telco is a power play: the customer threatens to leave and the CSP tries to bribe them to stay with as little as they can get away with. Translate this dynamic into an interpersonal relationship context and what you're describing is an abusive relationship. A relationship characterised by bribery, threats, disingenuous behaviour, a lack of trust and a lack of communication. 


Changing the terms undermines the trust

The latest betrayal of the customer can be seen in the short termist and abusive strategy seen in the UK market of raising charges mid-contract, with the telco arguing that the change is non-substantive and therefore the customer cannot cancel the contract. Such a tactic is highly unlikely to endear the telco to the customer, who will naturally feel bamboozled, frustrated and angry.


This is like re-examining the marriage vows to find wriggle room for infidelity or a range of other bad behaviour.


Naturally, it's led to a rising number of complaints in the UK, and calls by consumer bodies for Ofcom to investigate. The UK industry appears to be locked into a "clever" game of exploiting the letter of existing rules or artfully reinterpreting them to their own benefit, and then waiting for the regulator to clamp down - boosting short-term profits even if it's at the expense of their reputation or their relationship with their customers.


In the UK CSPs are required to give one month's notice of any change to their terms that is likely to be of "material detriment". If the new terms imposed by the CSP are deemed to be of "material detriment" then the customer can walk away from the contract. However, what "material detriment" means is not clearly defined. Vodafone has stated its opinion that this threshold will be when charges rise by more than 10%. So far Ofcom has not challenged this view. In my opinion this is just another example of exploitation by the industry of a weak and ineffective regulator.


But it's more than that, it clearly demonstrates how unhealthy and unreformed the UK telco industry is. It pretty much undermines all their claims to be customer focused, as they gamble with their reputations while other parts of their organisation plot how they can strategically exploit their "trusted" brand name.


You wouldn't treat a dog (or a prepaid customer) like this

You wouldn't abuse a prepaid customer like this because they'd just walk away. So why do CSPs think they can get away with treating postpaid customers like this? Having the customer tied in is one reason; but since all major CSPs behave like this then they calculate the customer really has little choice. That is until rivals who actually are customer-focused tempt away your customers with better treatment from right under your nose. (Don't go crying when they do.)


From the customers' viewpoint UK telecoms companies do look and act like a bunch of chancers and cads. They promise you the earth in their slick advertising, you exchange devices, and then once they get your signature on a contract they set out to systematically exploit and neglect you. Even when it doesn't start out that way, it's so easy to fall into this mode of behaviour.


In fact the industry is guilty of a whole range of lies and half truths they tell their contract customers. They keep getting away with them, but forget that anything less than honesty and straighforwardness rots the trust that's the basis of customer loyalty. Three obvious examples are:


  1. Fixed price contacts turn out to be anything but, with telcos claiming the right to raise prices by as much as 10%, with this right of course buried in labyrinthine T&Cs
  2. Unlimited data packages which have "fair use" limits. (Didn't you check the T&Cs?)
  3. Advertised speeds that bear no resemblence to the speed you can actually hope to achieve in real conditions. And while we can argue about why there will always be variation, practices such as throttling mean that speeds are never achievable at least in part because of deliberate actions taken  by the telcos themselves.

The point is that contacts enable CSPs to behave in a way that is anti-customer and therefore ultimately bad for their own business. While they wring their hands about how much they love their customers, are now customer centric and invest heavily in customer service, the lack of joined up thinking within the telco means that this is at best lip service. In reality they behave towards their postpaid customers in a manner that is most definitely not designed to engender trust or customer loyalty.


Long term contracts enable this exploitative behaviour, and that's just one reason why I believe that contracts are killing the telco business. There are lots of others, which we can explore in subsequent posts.

Incidentally it always amuses me when I hear from vendors, other analysts or journalists that operators will want to do XYZ because otherwise it will risk alienating customers, driving up complaints or churn. The cynical actions I have explained above demonstrate why such an argument is hopelessly naive.


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Comments (8)

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Hi Dominic - thanks for the link.


If we put aside the fact that the Spanish market is tough because of the terrible recession there - meaning that customers are unusually price sensitive, then this story add some interesting dimensions to this issue.


Once a market introduces handset subsidies it's hard to wean people off them, but that's also the key - "weaning". The CSP can't just stop subsidising full stop and that's the strategy: it has to design new offers and tariffs that appeal. I don't read this story as being just about stopping subsidy but about not creating new tariffs, plans, products etc that appeal.


Undoubtedly some people would like to pay for a handset on a rental basis rather than upfront; and we all like things cheaper or free. The point is the handsets aren't free, you're still paying for them it's just that many people don't understand how a bundle breaks down. There's a big customer education piece here also and the key matter of choice.


In the UK it's tended to be introduced differently, which is as a SIM-only option or 'keep your handset and get a cheaper price' offer. Giff Gaff, for example, don't subsidise handsets in a market rife with it.


It seems to me that CSPs cannot think how to create a better and more compelling experience, products and prices so they revert to competing on price and commoditising core services to keep customers. Once they have you signed up on the cheap deal though, they can ignore you for the next two years. To me this story really shouts that there is no loyalty rather than anything else, and that CSPs are still not very differentiated (or meeting the needs of customers).

I agree Ashley, although there seems to be a trend developing of people wanting to buy the handset upfront or reuse an existing handset... The effect the subsidised handset has had on market dynamics (and we must remember not all markets subsidise them!) is definitely subject matter worthy of a post in itself. :-)

Dominic I agree - the attitude to prepaid customers is frankly antediluvian. It reminds me of that old addage: if you love something set it free, if it comes back it's yours, if not it was never meant to be. Trying to trap people shows a lack of confidence and sophistication, and as I said in the article it also shows you're fundamentally unreformed IMHO.


Thanks for the comment

I guess this comes down to the definition of "loyalty" that most operators use, i.e. a lack of churn.


The only thing that can lead to genuine loyalty is behaving in a way which makes customers want to stay, rather than simply locking them in. This is what leads to the true customer engagement and strong NPS that all operators are after. 

Another great post Teresa, spot on. Contracts are an extremely blunt tool and are increasingly being shunned by customers who just cannot tolerate the lengthy lock-in period. This is highlighted by the number of people who are now happy to pay the full retail price for a high-end device such as the iPhone 5, and then to switch network service provider at free will. This is a massive failing by the MNOs who have all the assets to offer a great service and customer experience, but are more obsessed with trying to lock-in their customers to protect their traditional revenue streams. This plays straight into the hands of MVNOs and OTT service providers, and customers will simply vote with their feet when their contract expires.

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