Reconsidering Contracts

When John Q. Consumer strolls into Wireless Mart, he may not know which provider he wants, but he knows what he doesn't want -- bad service, high prices or an extensive contract. As he walks up and down the aisles of wireless phones and rate plans, he ponders his choices: service with a long contract, service with a short contract, service with an optional contract and service without a contract. Think you know which option John Q. will select? Think again.

You may have done all the research, surveys and focus groups necessary to reinforce the fact that subscribers hate contracts. So why are some no-contract carriers now changing their tunes and requiring service agreements? Because as much as subscribers hate contracts, they will tolerate them in exchange for quality service, competitive prices and promotional offers.

A few years ago, new PCS entrants offered contract-free service plans as a competitive weapon against cellular incumbents that were requiring subscribers to sign contracts for one, two or even three years. Today, those carriers are reconsidering contracts, making subscribers think about their wireless choices and creating service agreements that benefit both parties.

CONTRACT PROS & CONS In the past 12 months, both Aerial and Powertel have begun using service agreements.

"Three years ago, I would have predicted there would be no contracts because I thought that was the way the whole industry was going," said Andy Fountaine, Aerial Communications vice president of marketing. "We're not the only one who has started on one side and then gone back and implemented contracts."

According to Callie Pottorf, IDC research analyst, wireless and mobile communications, carriers can offer lower prices with contracts because there is more security that subscribers will stick around longer. And, if John Q. cancels his service agreement, you can recover most of your acquisition costs with a cancellation fee.

Fountaine said contracts lead to a more thought-out purchase decision by subscribers.

"(Contracts) eliminate people who really may not be committed to the category," he explained.

Mike Bashaw, Powertel vice president, marketing & product development, agrees.

If they're willing to sign a term agreement, he said, then they intend to stay with you.

Pottorf said contracts, even small ones, may intimidate newer subscribers, and John Q. may expect something, such as a higher handset subsidy, in return for signing. More-mature subscribers will know they can choose a carrier that doesn't require contracts, and these subscribers are more valuable to you because they tend to spend more.

"Unhappy subscribers may not feel like they can complain because they signed a contract, but you can be sure they'll churn as soon as their contract is up," she said.

Pottorf said contracts alone won't lower churn -- better customer service, individual attention, good service quality and competitive price will.

CONTRACT PHILOSOPHIES When Aerial launched, Fountaine said the company believed that contracts were problematic for subscribers.

"We went out of the chute very customer-focused and said, 'You shouldn't have to have a contract with somebody,'" he said.

But a few things happened during the first year and a half of business that led the company to reconsider. It had excessive churn rates, and Fountaine learned from focus groups comprised of former subscribers that churners opposed contracts because they didn't allow them to use the provider's service as a "trial vehicle."

Without contracts in place, subscribers weren't considering their purchase decisions seriously because there really wasn't any risk. This led to a lot of people who were convinced of their need for wireless to jump in and out.

Fountaine said this behavior skyrocketed Aerial's post-pay churn rate above the industry average.

"We had an operational performance problem," he said. "Marketing had to objectively step back and take a look at what was going on in the business. We went out, did some research with consumers, and once you started to segment them and understand who was coming in committed and who wasn't, it just became a very cut-and-dry thing."

Fountaine said the decision to implement contracts was "traumatic" for Aerial, so the company decided to do it in the most customer-friendly way possible. Aerial decided that if it had to implement contracts, it would serve them up as a service agreement with nothing to sign. If consumers break the seal on the box and activate the phone, they activate the contract, and there's a $150 disconnect fee if subscribers disconnect in the first 12 months. After that, they can disconnect without penalty. In addition, the carrier took the hassle out of contracts, with no paperwork for them and no fine-print or hidden fees for subscribers. Aerial's subscribers can change their rate plans or add services at any time, too.

"Most (carriers), when they have people sign contracts, force them to stick on a given rate plan. Wedon't do that," Fountaine said. "The only obligation you have is to remain our customer for one year. That's it."

Like Aerial, Powertel didn't require contracts initially, but has since changed its mind. The carrier began offering optional contracts about a year ago. According to Bashaw, increased subscriber choice and control was a strong focus of Powertel's efforts to offer optional contracts.

"It wasn't believable because the industry has conditioned the consumer to believe that the carriers really control the contracts," he explained. "We blended that in with our new brand vision statement, but found that in order for that to be believable, you had to support it with some factual statements about who we are and how we operate."

Bashaw said contracts do frighten certain consumers, but others aren't concerned about contracts at all.

"We only require, when we do offer contracts, a 1-year term, and for most people one year is nothing," he said. "It's not really a huge commitment on their part. It's when you get into 2- or 3-year contracts that it scares consumers off."

CONTRACTS & CHURN One year definitely has made a difference for Aerial. Before it implemented service agreements in February 1999, its post-pay churn rate was about 5.5%, Fountaine said. Currently, the company's churn rate on post-pay plans is 2%, a marked improvement. Contracts choked off the "Looky Lou" trial behavior, decreasing its churn.

Fountaine said he also has been pleasantly surprised at how easily the service agreements were implemented and accepted, by both Aerial and by consumers.

He said the service agreements haven't deterred new subscribers, and he hasn't heard many complaints from current ones. As it implemented the service agreements, Aerial tracked its customer complaints and found that less than 0.5% of the complaints it received were about contracts.

Perhaps the lack of complaints resulted from Aerial's work to implement customer-friendly contracts. The company grandfathered current subscribers and deliberately made its pricing more competitive as well. If any of its existing subscriber base wanted to switch to the new price plans, they had to agree to a service agreement, but it was entirely within their control, Fountaine said.

"They could either stay where they were forever or get the more-aggressive pricing -- a 10% to 20% reduction in rates -- with a 1-year contract," Fontaine explained.

Fountaine said contracts won't solve every problem, and you just can't implement a contract without also doing something positive for the subscriber.

To make its optional contracts more appealing, Powertel offers lower prices, quarterly promotional offers, such as additional minutes on any rate plan or a $50 credit on subscribers' second-month invoice, in exchange for a 1-year term agreement. For example, with Powertel's bonus-minute rate-plan promotion, subscribers enjoy the savings for 12 months and then go back to a standard rate plan.

"What's interesting is that gets them in the door, but only about 40% of the customers opt for (service agreements)," Bashaw said. "The reason is that we've got very good, competitive rate plans as it is."

Powertel doesn't offer service agreements that obligate subscribers beyond one year. Bashaw said customers generally like the flexibility of a month-to-month agreement, and that's fine with him. During the year that Powertel has experimented with contracts, he said its churn rates have decreased.

NO EXCUSE FOR BAD SERVICE IDC's Pottorf said Powertel has a good idea, offering an incentive when subscribers sign a contract. You should give subscribers a reason to sign service agreements, but you can't mask problems with a contract.

"If service is poor, then customers will pay any cancellation fees to get rid of the service and choose another provider," she said.

Aerial's Fountaine agreed.

"You have to look at your reasons for churn," he said. "You can't use a contract to make up for poor service. If your service is poor, you can lock them in for a year or whatever, but they're gone the minute month 13 rolls around."