My wife and I recently relocated to another state, which, if you haven’t done it, is a lot of work! One of the least fun aspects of moving is comparing utility companies. It’s often difficult to track down the best deals when you aren’t familiar with the local companies.
One of the most important services for us to nail down was an internet provider, since I do much of my work online. We moved to a rural area and there is only one company in our subdivision that provides cable internet service, though there are several which provide DSL service.
However, my wife I don’t use a landline – we only use cell phones. In addition, DSL isn’t fast enough for our needs – we do a lot of work online and we stream TV on our computers since we recently canceled cable and sold our TVs. No phone and no cable TV means also means we can’t save money with a bundled package.
So basically there was only one company in our subdivision that offered the service we needed. At first it seemed like they had us over a barrel. First, a little more background, then the pricing structure…
My wife and I needed a short term arrangement for our internet service – we are planning on buying a home, but we decided to rent a place for a few months while we look. In my opinion, it is usually better to rent first when you relocate because it gives you more time to find the house you are looking for. So we entered into a 3 month lease with a month to month option, giving us some breathing room to make the move and buy a house at our own pace.
Unfortunately, the best deals are for people who are willing to lock into a long term agreement. It makes sense for the service providers to offer these kinds of deals, especially when coupled with an early termination fee. Cable and internet providers, satellite TV providers, cell phones, and similar services are well known for this tactic – hook customers with a low introductory rate, then give them an early termination fee in the contract as an incentive not to leave.
When paying an early termination fee is worth it
My wife and I weren’t sure how long we could lock ourselves into a contract, since we only have a short term lease and didn’t want a long commitment or early termination fee hanging over us.
So after ascertaining there was only one option available to us, I ran the numbers for the installation fees, monthly service charge, and the early termination fee to determine the break even point.
Here were my options (12 Mbps):
- $63/month without a contract. $60 installation.
- $55/month with a 12 month contract ($120 early termination fee, prorated $30 every 3 months). $30 installation.
- $20/month for the first 12 months, then $35 a month for the next 12 months with a 24 month contract ($240 early termination fee, prorated $30 every 3 months). $20 installation.
The numbers, including the installation fee, monthly service and prorated early termination fees came out looking like this (no contract, 12 month contract, 24 month contract):
- Month 1: $123 $205 $280
- Month 2: $186 $260 $300
- Month 3: $249 $285 $320
- Month 4: $312 $340 $310
- Month 5: $375 $395 $330
- Month 6: $438 $420 $350
- Month 7: $501 $475 $340
- Month 8: $564 $530 $360
- Month 9: $627 $555 $380
- Month 10: $690 $610 $370
- Month 11: $753 $665 $390
- Month 12: $816 $690 $410
The numbers were surprising. As you can see, the break even point for the 12 month contract is the 6 month point, but it’s only $20 more to beak the contract at the 5 month mark. I was all set to go with this contract until I ran the numbers on the offer that came with a 24 month contract.
Running the numbers shows me that I only need to keep the service for 4 months before breaking even. Then the savings add up quickly – and substantially. In fact, it is cheaper to cancel in month 4 than 3, and in month 7 compared to month 6, etc. because the prorated early termination fee drops $30 every 3 months, and the service is only $20 per month for the first 12 months.
My wife and I will be in our short term lease for at least 3, and even if we leave right at the 3 month mark, I will simply pay for a month of service without using it, then cancel and pay the early termination fee.
The psychology of early termination fees
I’m sure the company ran the numbers and they know when they will and will not break even. But my guess is that most people won’t actually run the numbers and most people won’t choose the plan that has the higher early termination fee if they are in a similar situation as my wife and I (they aren’t sure if they can commit to a long term contract). And I can certainly understand that – many people hate paying anything that has the word “fee” attached to it.
I asked the phone rep about this and he mentioned that he has tried to explain the pricing structure to many people in the past, but the majority of new customers choose the 12 month contract because they are afraid of the commitment and $240 early termination fee.
Overall, I think the 24 month plan and high early termination fee must work well for the company – they get a long term customer, they can lock in their rate and create earnings projections, they get an early termination fee when people leave early, and as a side effect (whether planned or not) they probably scare a lot of people into choosing a more expensive monthly plan because they are afraid of the early termination fees.
As for me, I’ll happily pay the early termination fee – as long as it is after the 4 month break even point!