Note 25: Billing Contracts

Posted: 18 March 2007

Commitments over time

Contracts add the dimension of time to the charging structures outlined in earlier notes. Whilst bundles and individual charges are concerned with the next invoicing period, contracts associate information across multiple invoicing periods enabling commitments over time to be measured, rewarded and penalised.

Contracts can be defined prior to their sale, or customised as part of the sales process, but in either solution the contract's business costs (e.g. configuration, customisation, complexity) must be covered. Contracts with small margins can be recovered through substantial customer sales. Contracts that address high margin or high volume revenue can be applied to smaller customer bases.

For example, pre-packaged contracts sold to the consumer mass market (e.g. for mobile phone services) have their details predetermined, and are rarely subject to customer negotiation. These mass market contracts are marketed broadly by billers and deliver the same charging structures for each subscriber / purchaser. In comparison, large corporate customers use negotiation and/or tender processes to obtain highly customised contracts from the biller. These contracts are highly tailored to specific customer's needs and are likely to be renegotiated / retendered at their completion.

Contracts can associate multiple charging parameters and mechanisms including:

Contract Length: In return for their commitment to the biller, the customer will receive the contract's defined benefits. For the customer, the contract's benefits must outweigh the 'a la carte' purchasing alternative to warrant submitting to the contract's lock-in period.
Spending Levels: Based on defined spending levels, the customer receives better rates, prices, or credit rebates over the contracts duration.
Non-financial commitments: Customers may commit to purchasing a specific quantity of product, connecting a minimum number of new network services, or reducing their consumption in certain areas (e.g. peak summer electricity). These commitments can be employed when calculating rewards and penalties.
Equipment: The biller may subsidise customer equipment (e.g. mobile phone) as a contract benefit. This cost attracts the customer's business, and is repaid (hopefully) by the customer's purchases over the life of the contract.
Special Rates: Improved rates can be offered for the customer's contract commitment. These rates may be delivered using bundles, and/or by applying different contract rates for 'a la carte' purchases.
Discounts: Along with improved rates, the customer can benefit from better discounting. Discounts may be larger, or apply from an earlier spending level.
Non-financial benefits: Examples include 'free' minutes of phone calls and frequent flyer reward points. Customers value these benefits differently. Non-financial benefits can be included to attract (mass market) customers. Alternatively, they can be omitted, reducing the biller's cost structure, and allow a better rate to be offered to the customer. Corporate customers may value consistently lower prices over receiving frequent flyer points (especially if their use generates additional administration costs).
Rewards: Customers who meet defined goals can receive rewards such as rebates or improved rates. Rewards may be applied retrospectively against historical spending, be reflected in the rates used to calculate current spending, or be applied as credits against current or future invoices.
Penalties: Just as rewards can apply, so can penalties. Penalties can be applied for not meeting goals similar to those mentioned for rewards. In addition, penalties can apply when a contract's commitments are broken. For example, a financial penalty may apply for early contract termination with the amount dependent on the remaining contract period. Often, this is used to deter early termination when equipment is being subsidised (e.g. mobile phone). Identifying when a contract is broken (and the resulting impacts), has the same warning and identification issues as bundle breaking.
Service Levels: In addition to strictly financial measures, other aspects of the biller's customer service delivery can be negotiated and included in a contract. These non-financial measures don't impact the customer's billing directly (except when presented on the customer's invoice), but can form part of a contract's overall terms and conditions.

Contracts can be charged for using the same billing mechanisms used for bundles. That is, separate recurring and non-recurring charges can be levied for a contract's commencement and its ongoing application. Contract 'usage charges' do not have much meaning within the context of the contract mechanism. Where usage charges are part of a contract's product scope (which is quite likely), they can be billed using the regular charging approaches including bundles and 'a la carte' pricing.

Contract Examples

Two separate examples will illustrate how contracts can deliver different billing outcomes. Each example will include contract and no-contract alternatives. The same products are included, but customer choosing the contract's rates and condition are likely to receive improved prices.

Note, not all customers will choose the contract option. Based on their individual circumstances, some customers will be charged less for the no-contract alternative, or will require the flexibility that month-to-month billing provides.

Mobile Phone Example

Contract details

Contract Period: 24 months, monthly billing in advance via credit card, free paper invoice.
Spending Level: Calls will be charged at the contract's rates - a minimum of $50 will be charged per month.
Non-financial resources: 400 free minutes per month to use on weekends. Free minutes can be used in the current or subsequent month (after which they will 'expire').
Special Rates: A bundle of call rates will be discounted 20% from the standard list prices and incur a smaller flagfall. Rates will remain fixed for the life of the contact (based on the list prices applying at the contract's commencement). Additional products and services chosen 'a la carte' (e.g. SMS) will be discounted by 10%.
Discounts: Monthly invoices above $200 will be rebated at the rate of 25% of the surplus on the customer's next invoice.
Service Levels: Customers with monthly invoices above $100 will auto-qualify for 'Better than Basic!' customer support.
Equipment: A 'BUZZ 2000' handset is provided at no charge to the customer as part of the contract.
Rewards: Existing customers who sign-up to this contract will receive a $50 rebate on their first invoice.
Penalties: Customers terminating their contract earlier than 24 months will be charged $50 per month (at termination) for the remaining contracted months. Customers who terminate within 12 months will be charged $500 for the 'BUZZ 2000' handset.

The no-contract alternative

No commitments: Month-to-month billing with a $2 charge for a paper invoice, one-time administration (connection) charge of $50.
Rates: Customers are charged full list price for all products and services (including calls). A monthly $20 access fee will be charged. No special discounts. Rates may change with 30 days notice.
Equipment: Handsets are available for purchase (at full cost), or the customer may use their own at no charge.

ISP Example (Broadband Service)

Contract details

Contract Period: 12 months - monthly billing in advance via credit card, no paper invoice
Spending Level: $70 per month
Non-financial resources: 4 Gb of included data downloads each month. Free access granted to the ISP's proprietary 'Games Domain'.
Special Rates: Free installation. Excess data downloads discounted by 25%. Rates changed with 120 days notice.
Equipment: The customer is provided with a free 'Blink 2020' broadband modem.
Penalties: Customers terminating the contract earlier than 12 months will be charged $70 per month (at termination) for the remaining contracted months, will be charged $200 for the modem, and $100 for installation.

The no-contract alternative

No commitments: Month-to-month billing with a $5 administration charge, one-time installation charge of $200
Spending Level: $40 per month
Non-financial resources: 500 Mb of included data downloads each month.
Rates: Excess data downloads charged at the list price. Rates may change with 60 days notice.
Equipment: Broadband modems available for purchase at $300, or the customer may use their own at no additional charge.

Tags: Billing, Contracts