Long Term Contracts
Financial Management

Long Term Contracts

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For most service providers they usually want you to sign some kind of multi-year contract agreement as it guarantees them business. To do this they usually entice consumers with methods such as offering a free item like say an LCD monitor or a slash in price. Someone once told me as an example that a cell phone carrier usually begins making a profit off a customer after about one to two years of service. While this may sound shocking initially from a consumer perspective, business wise it makes sense as you have to factor in the amount money that was required for things such as advertising just to get one customer. It’s not too far fetched to say that it costs a company $200 or $300 to acquire a customer.

So how this relates from a consumer perspective is that whenever you are offered what looks to be like a great deal which requires a long term commitment, I think you should base the value of it not necessarily in comparison with the vendor’s own price but rather your other options as well. For example, here in Vancouver the choice of having a DSL or Cable Internet connection is a pretty flexible. Now a lot of times a person would say look at the DSL price at its regular monthly rate and think that it is kind of expensive. They then see an option on how if they sign a three year deal they will get a free gaming system.

I know most people do not like to do this, but in this case doing some value comparison instead can potentially save you a lot of money. For example, is saving 50% on a chocolate bar that is selling for $3 when you can get the same thing from another company for $1 elsewhere really a deal? I hope you said no. Like with the case with the Internet connection, by looking at it from a feature and quality perspective you can set yourself up to really determine if you are getting a good deal in comparison to what is out there. As described above, it is in the company’s interest to lock you in a long term plan, so that means you should be equally vigilant in making sure you are getting the best value for yourself as well.

While this may sound like a basic financially common sense to some, I think it is safe to say that most people do not do that. Even worse, don’t sign for a long term commitment just because it sounds like a bargain when in reality you never really use enough of it to justify having a long term service agreement. Gym memberships would be an example of this for many people I’d say. Again, base your decision on the value of what you are getting as oppose to comparing the vendor or service provider’s own original prices before committing to something long term.

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