Telecom Cost Management : Rate increases

Another problem revealed in the contract quote is the potential for rate increases. A few times each year, the major long-distance carriers increase the gross rates listed in their tariff. Over the past decade, a typical rate increase is 3% per quarter. Under this system, a customer’s rates will have increased by more than 30% over a 2-year period.

For example, Acme Manufacturing spends $10,000 per month in long distance. Its current contract is about to expire, so the company’s AT&T account executive offers a new contract. The proposal shows that the new pricing plan will drop Acme’s monthly billing to $8,000. Acme, excited about saving $2,000 per month, signs a new contract with AT&T, which explains that the only way to get these great prices is with a 3-year agreement.

Every quarter, AT&T implements a 3% to 5% rate increase, and most customers never notice. If a customer notices the increase, he figures it is because employees are making more calls than before. After 2 years, Acme’s bill is back up to $10,000, thanks to the rate increases.

AT&T then informs the customer of a new pricing plan that will cut the bill by $2,000 per month. The account executive says AT&T will be happy to void the current contract as long as it is replaced with a new 3-year contract. Rather than pay an extra $24,000 over the course of the next 12 months, the customer signs the new contract. And, you guessed it, every quarter the rates are incrementally raised, starting the cycle all over again.

The only way out of such a cycle is to bite the bullet and complete the third year of the contract. At that time, the customer will have maximum leverage to negotiate a better plan with the current carrier or may then switch to a lower cost carrier that guarantees its rates, such as Qwest, McLeod USA, and a host of resellers.

Carriers do not guarantee their rates because they fear certain market forces that could affect their revenues, such as inflation and new technologies. Ten cents a minute for long-distance calling is used as a benchmark today. If all the carriers guaranteed to charge their customers only 10 cents a minute, inflation would eat away the carriers’ profits. New technologies such as free voice calls over the Internet also threaten a carrier’s revenue potential.

The average phone company executives are eminently more concerned with pleasing their stockholders than they are with pleasing their customers. “Creating stockholder wealth” is the mantra for most companies. Sometimes the only way to take care of stockholders is to neglect customers.

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