The Truth About GPS Tracking Contracts

Before you sign that GPS tracking contract for your fleet, let me tell you a story.

At the turn of the century, when GPS tracking devices routinely sold for as much as $1000.00 per vehicle, three to five year customer agreements were the industry norm. Back then, fleet tracking was a specialized business and required an exhaustive amount of programming and preparation to set up each system. Cost and complexity demanded long-term commitments from customers.

That’s how things used to be

Then came the World Wide Web, in all its efficient glory. No longer a complex enterprise solution, GPS tracking could be delivered through Internet-based software at much lower cost. Competition in the industry skyrocketed.

To create differentiation and grow the market, many GPS tracking providers bundled hardware and services together in order to reduce the capital cost outlay required to purchase a fleet management system. Monthly plans ballooned to as much as $60.00 per vehicle, but capital cost outlay dropped to as low as $0.00.

Sales blossomed.

Large public companies ensued, leveraging their balance sheets to internally subsidize or finance hardware. Wireless carriers (cellular networks) noticed the revenue potential and the ability to load their networks with ancillary data, so many became competitors. No industry was more adept at subsidizing hardware on a long-term contract than the cellular carriers, so coming up with low capital outlay GPS tracking schemes was a natural fit.

At this time, long-term contracts were necessary due to the hardware subsidization schemes.

But wait a minute…

If we take a look at the typical end-user GPS tracking contract from two to four years ago, approximately 50% of the monthly payment went to hardware (the GPS tracking device itself), while the other half went to the monthly service fee (GPS tracking plus mobile data). At the end of the typical three-year term, the hardware was basically paid for.

Yet many unsuspecting fleets continued to pay their $50.00 or $60.00 per month fleet tracking bills long after the hardware was paid off.

This was especially prevalent with cellular carriers that were in the GPS tracking space. Consider this: Let’s say your Blackberry mobile telephone three-year contract is up – are you expecting a phone call with the news that your monthly cell phone bill was going to drop to half the cost? The same applies to your $60.00 per truck GPS tracking system. Seems someone forgot to tell you that your bill should drop to $29.95 per truck from $59.95. Oops!

For better or worse, GPS hardware costs are lower

GPS hardware has continued to drop dramatically in price due to market growth and manufacturing economies of scale. Consequently, the need to subsidize or internally finance GPS tracking devices has been significantly reduced. Why finance a piece of hardware that only costs $150.00? Would your organization lease a $149.95 HP Printer? Not likely –it would simply be expensed.

In the days of past, many large fleet management companies created differentiation by manufacturing their own GPS tracking hardware. To do so now would be suicide for most, as they simply could not compete with the large scale manufacturing that goes on today. This has helped level the playing field and further erode pricing and margins. Even the smallest GPS tracking provider can purchase and supply world-class hardware today. Similarly, even the largest of providers no longer have a proprietary hardware advantage.

Here’s an example…

Differentiation?

Our fleet management division, GPS Commander®, recently replaced the GPS system for Santa Fe Towing in Lenexa, KS, that had completed their three-year contract with Fleetmatics®, one of the largest telematics companies in the industry with over 300,000 subscribers.

When it came time for the customer to install the new units we shipped him, he didn’t need to bother – his team simply plugged them into the existing Fleetmatics wiring harness! So much for hardware differentiation…

Times have changed

In addition to ever-lowering hardware costs, wireless data pricing has also dropped substantially, due to more efficient wireless technologies and greater competition.

Meanwhile, the number of competitors in the commercial GPS tracking space has shot up exponentially. Web based tracking systems, device management portals and over-the-air programming has greatly simplified the task of provisioning a fleet management system. New systems can be provisioned with a couple quick clicks of the mouse.

Competition is fierce and differentiation is hard to come by in the general fleet tracking business. Several large public companies have disappeared from the fleet management business. Eventually, shareholders demand profitability –you can’t print money forever, unless you’re Uncle Sam. Competitors have swallowed others as the market consolidates. Shareholders demand growth and if it can’t come organically, it will come by acquisition. Many of the wireless carriers have exited the retail side of the fleet management business, in order to avoid competing with their own customers (other fleet tracking companies) and focus instead on being the transmission medium.

Reduced barriers to entry have opened the market to smaller, more agile companies, with lower cost structures. The tables have begun to turn on large, high-cost of sales fleet management companies, as the market has become commoditized. Margin-dollars are shrinking, as hardware and services pricing comes down.

So why do most providers insist on long-term GPS tracking contracts?

Despite all these changes and the new market dynamics, most fleet tracking continue to insist on long-term contracts from their customers. Here’s why:

1. GPS tracking contracts put more cash in their pocket. Larger entities tend to book the net present value of the entire contract, to inflate their revenue and corporate valuations. Example: A three-year contract at $200.00 per month would be shown on the books at an NPV of approximately $6700.00. The increase in booked revenue paves the way to full throttle debt or equity financing, which drives growth.
2. Long-term agreements hide true hardware pricing. Contracts allow internal hardware financing, which reduces capital outlay to the customer, while hiding true hardware pricing and increasing hardware margins for the provider.
3. GPS tracking contracts minimize churn. When fleet tracking customers and their revenue base are locked in, providers think they can rest easy with lower customer turnover.

Here’s what this means for you

Not much.

Some may argue that all that hidden hardware margin and booked revenue-fueled growth results in higher R&D and a better product – but we haven’t encountered that in our experience.

Consider the example above, where the Fleetmatics® customer paid approximately three times the price for the identical GPS tracking device offered by GPS Commander – and missed out on our lifetime hardware warranty, too.

It’s also easy to assume that long-term deals and costly hardware signals “better” product features than the affordable solutions. That’s up to you to decide. What’s truly “best” for your tracking needs?

Here’s what you need to ask before you sign

Take a closer look at that GPS tracking contract. Get answers for the following questions:

1. Is a month-to-month agreement available, and if so, how does that affect the quoted price?
2. What happens after your X-number of years contract is up? Do you own the equipment at that point?
3. What happens to your monthly rate after your contract is up? [TIP: get the answer in writing.]
4. Assuming you own the hardware after your contract is up, can you use it elsewhere?

[If you can’t, then its value to your company is basically zero. For example, Santa Fe Towing, whose three-year contract with FleetMatics® had just expired, came to us recently to switch services for their 40 vehicle fleet to GPS Commander®. Although Santa Fe had obtained an official letter from Fleetmatics, confirming Santa Fe’s ownership of the hardware, when we attempted to re-program the units to our system, FleetMatics® officially refused to let the original device manufacturer (which we also use) release the over-the-air programming ownership to any other fleet tracking company.]

1. Are those units you are purchasing proprietary? Can they perform anywhere else?
2. What cellular protocol does the provider use? Is there a possibility that by the time your contract expires, they will be obsolete?

The truth is, a long-term GPS tracking contract is not your only option. Take advantage of the competitive landscape and enlist a provider that earns your business and loyalty each and every month.

Fleetmatics is a registered trademark of Fleetmatics Ltd. 2013

GPS Commander is a registered trademark of Future Quest Wireless Inc.