Long-distance contract discounts

Long-distance rates are determined by applying a discount to the gross rate. The discount amount and the way it is applied differ between carriers. Each carrier offers multiple rate plans with varying discounts. Discount amounts even vary from one customer to the next. Most customers are content with their current rates until they become aware that lower pricing is available. Long-distance profit margins are high, which leaves plenty of room for customers to negotiate.

Volume and term commitments
The main factors that determine customers’ discount amounts are the volume and term commitments in their long-distance contract. In return for the customer’s promise to spend a certain amount for an extended period of time, the carrier offers a discount. The greater the volume and the longer the time, the greater the discount. Table 1 shows a typical discount structure used by long-distance carriers.


Table 1: Typical Long-Distance Contract Discount Structure

Most volume agreements specify the amount of net dollars spent each month. Net dollars are the actual dollars spent, not the prediscounted gross amount. AT&T’s Uniplan contracts calculate the volume using gross dollars on a monthly basis. Some volume plans are calculated annually. It is very important for customers to know if their volume commitment is net or gross and if the volume is calculated monthly or annually.

One-rate discounts
As the market becomes more competitive, carriers want their discount structures to be less complex so they can more efficiently set up new accounts. They also want potential customers to be able to easily compare their offer with other offers. That is why many long-distance companies are switching to one-rate billing with a level discount amount for all services, such as 30% off long-distance, paging, and mobile phones. If a carrier is trying to win a company’s long-distance business, the proposal is normally clear and easy to follow. The phone bills, however, are not as easy to understand.

Save money with volume agreements
A simple way to reduce your long-distance bill is to increase your volume commitment, which will result in a greater discount amount. Most businesses wisely undercommit to avoid a shortfall penalty, but if you have extra volume, you should consider increasing your volume commitment level.

Your carrier will prefer that you sign a new contract with the increased discount, but you should first press the carrier to modify your existing agreement. If the carrier is inflexible, and you are not comfortable with a new agreement, you can move your “overflow” traffic to another carrier with lower rates. This will definitely get your carrier’s attention. Many businesses use multiple carriers so their carriers never take them for granted. It is amazing how the level of customer service increases when a customer uses more than one carrier.

Save money with automatic discount upgrades
In many of its contracts, Qwest has a built-in clause to automatically increase a customer’s discount if its volume hits the next highest level. For example, a small tax accounting firm committed to $2,000 per month with Qwest and received a 35% discount. From January through April, the firm’s call volume doubled. In April, the bill passed the $4,000 mark, which is the next higher volume commitment level. Qwest automatically increased the discount to 40% for that month only. In May, the bill volume decreased again and the discount was back to 35%.

When is the true-up?
It is vital to understand how the actual long-distance usage will be reconciled against the contract’s volume agreement. Long-distance accounts experience a true-up either monthly or annually. With a monthly true-up, the customer is required to bill at least his volume commitment each month. If he falls short, the carrier will add the difference to the bill. Annual commitments true-up the account at the end of the contract year. Figure 2 shows an example of a monthly true-up from a Telephone Company D bill.


Figure 2: Sample of Telephone Company D’s monthly true-up bill.

This concept of the volume commitment true-up procedure is best illustrated with an example. Two brothers, Terry and Tony, each own their own summer resort. The business is seasonal; they rarely use the phone in winter. In the slow months, their long-distance billing is only $500 per month, while in the busy months, their billing rises to $1,500 per month. Table 2 shows a comparison of the billing for both brothers.


Table 2: Annual Versus Monthly Commitments

In January, Terry signs a new long-distance agreement that specifies a $12,000 annual net commitment. He understands that the true-up will happen at the end of the contract year in December. Tony follows his brother’s lead and signs a similar agreement, but Tony’s agreement specifies a $1,000 monthly net commitment. Tony does not read the fine print and is unaware that his account will experience a monthly true-up. Over the year, they used the same amount of long distance and have the same rates, but Tony ends up paying more than his wiser brother. At the end of the year, they compared their bills and found that Tony spent $2,250 more than his brother.

Usually, the true-up happens in the same period expressed with the volume commitment. A monthly commitment of $1,000 is reconciled each month. An annual commitment of $120,000 is reconciled at the end of each contract year. These guidelines hold true in all cases but one. The major exception to this rule is with AT&T’s Uniplan billing. Uniplan volume commitments are expressed monthly, but the true-up happens at the end of the contract year. Therefore, a seasonal business is not penalized in its slow months.