Locking customers into long-term contracts is one way that helps service providers make money. When you agree to sign a two-year contract for internet, phone, or similar services, for example, you become a valuable customer, and a captive target for future advertising. The provider has your payments guaranteed, and you can be sold add-ons, upgrades, etc. At the end of the term, you probably have settled into the service, and less likely to switch to a competitor.
A long-term contract doesn’t have to mean that you waive your right to shop around. In many cases, if the market for whatever service you’re buying has changed in your favour, your provider may be open to negotiation if pressed to do so.
Still, there are many factors that you should consider before agreeing to a long-term contract.
Rate surprises
Does the advertised rate apply to the entire period? Many providers advertise a relatively low rate to lure new customers, but they limit the rate to an introductory period — like three months or so — -and they hike the standard rate to make up for it. They may be giving you also several other perks to get your business. Once they go back to standard rates, the deal may be as expensive as anything that provided by any other provider or even more costly.
That is why it is important to always check how much the entire term of the contract will cost you, and divide that by the number of payment periods. By doing so, you will be able to compare rates realistically. In addition, look out for any clauses that say the provider can change the rate without notice. These clauses simply mean the contract doesn’t mean much. If the rate change will at an automatic renewal, it is your duty to check ahead of that date to know if your new rate will be acceptable.
Compare offers
If an offer is attractive, it doesn’t mean it is the most attractive offer out there. By shopping around you may find that other providers have very comparable rates without the commitment requirement. A common example is gym membership. If you are not sure that you will be committed to working out for an entire year, paying a little more for a month-to-month membership can be less expensive.
In comparing offers, pay attention to the level of commitment required. Some long-term contracts may be totally in your favour as they guarantee a low rate, and getting out early requires a small fee. Others, however, may require several payments or even the entire outstanding amount. There could be some penalties or a clause that requires you to pay for the perks that you initially received at no or low cost.
Think of the future
Although a year or two are not a long time, long-term contracts can lock in a deal that doesn’t meet your growing or changing needs. Think of it this way: Do you want to sign a 5-year lease on a one-bed apartment if you’re just starting a family? Of course not, because you can see that won’t work for you in a couple of years. Similarly, if you are buying anything from internet service to gym membership, think of how your life might be changing as far as you can foresee. And that is another point where considering the cost of existing the contract becomes critical.
Sometimes the future changes may justify the immediate low cost and any costs related to having to change it, however. For example, if you’re unemployed or on a very tight budget, your priority will be to go with the least expensive options out there in almost everything. If your situation improves significantly — by getting a job, a huge pay raise, etc — and you’re ready to upgrade, the cost may not hit your budget as bad. In addition, retailers and service providers are often more open to negotiation if you upgrade and move to a higher price — and if you will sign another long-term contract.
Factbox: Think before you commit
Long-term contracts can be more expensive than they appear
Check for exit fees, rate changes and terms
Think of your changing needs in the near future
The writer, a former Gulf News Business Features Editor, is a Seattle-based editor.
