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Contract Loyalty is no Loyalty at all

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The economic cycle we are enduring triggers a degree of introspection. Among the questions burning in my office: How did consumers allow their homes to be turned into ATM machines via home equity lines of credit? How could the big banks be truly surprised by their mounting loan losses. Why do we only recently recognize that the US auto makers are not building vehicles that compare favorably with foreign brands?

Since the entirety of our Federal government is challenged to come up with answers to these questions, I’ll tackle some easier ones:

  1. Can a business that depends on “loyalty by contract” generate any true loyalty at all?
  2. Are businesses that depend on long term contracts for success in serious jeopardy?

No, and Yes.

The wireless phone industry is hopelessly hooked on handset envy and long term contracts. The argument goes that the high price of handsets can be sheltered to the consumer through subsidized entry pricing that is amortized over a long term contract. In the process, wireless carriers leave consumers no room for a change of mind and lock them in with penalties that apply even if their own service is terrible. As a current example, it seems silly to be forced to choose between two great new Blackberry models, the Bold and Storm, based on whether your current carrier is ATT or Verizon.

The wireless world did not fall apart when number portability was introduced a few years ago. Nor will it fall apart if consumers are allowed to match their favorite handset to their preferred carrier. In fact, freeing consumers to buy the handset they want will accelerate the number of phones purchased per person over their lifetime. Over time, the market will force the price of new handsets to be adjusted to a more reasonable figure.

In the long run, the first wireless carrier to take the courageous step to evolve their business model will win big over the longer run. Consumers will flock to the carrier that puts them first, and in a highly commoditized business, improving service and becoming more customer centric could be the keys to future success.



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