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Contract vs Tab: What’s the difference and how do they work?

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The advertisements look the same: get a free* phone! It’s what’s behind that asterisk – the fine print – that matters. In the mobile world, customers are used to getting devices for free (or steeply discounted) and paying monthly.

This was first introduced with the idea of a fixed-term contract. Mobile companies realized it was more profitable to have you locked into their service, paying monthly, than to have to buy the phone off of them and leave. They wanted recurring revenue. Through various market forces, particularly around consumer choice and protection, a new form of device discount was invented: the tab. Similar to a loan, you pay it off in increments.

So what does the shift in the fine print mean for consumers? It points to a different kind of “locked in” – you are beholden by dollars, not by time.


What’s a phone contract and how does it work?

The basic formula is that you’re using time as currency. The longer you stayed with a phone company via a contract, the bigger the discount you got on your device – all the way to a free phone.

When the idea of contracts first came about, it was fairly straightforward: a fixed term contract (3 years was standard in Canada) awarded you a specific dollar discount on your phone. If you chose a cheaper phone, it meant you got it for free. If you chose an expensive phone, it meant you got it at a large discount. If you signed the contract and wanted to break it, you were charged hefty cancellation fees.

A second wave of contracts offered more choice: a scale, where you could choose the time commitment you wanted versus the discount you wanted. This gave rise to consumer choice of 1, 2, and 3 year contracts with scaling discounts. Usually, phone companies offered a non-linear scale, giving significantly more off on 3 year contracts to entice customers to lock in. Along with this shift came the idea of tiered pricing. If you locked into a contract that gave you an outsized discount, you’d often find yourself paying more per month for the same plan.

For example: a 1 year contract gave you $100 off a phone and your chosen phone plan was $50 a month. A 3 year contract may offer you $500 off a phone, but that same plan would cost $75 a month. Using this method, phone companies recouped their losses on the increased phone discount and you got locked into a higher price even after your term was up.


What’s a phone tab and how does it work?

Due to increasing customer frustration – and the technological innovation of “unlocking” phones to switch carriers – a new form of phone payment plan emerged: the tab.

Unlike contracts, which used time as currency, tabs focus on the retail value of the phone. Then a certain percentage of your bill is applied each month to pay down the tab. When you’re done paying off the phone, you can do what you’d like: leave the carrier, upgrade your phone and reset the tab, or stay as-is. In this way, tabs are like interest-free loans, with the phone companies earning profit on the device sale slowly over time.

Tabs can work one of two ways:

  1. The tab portion is taken from your bill
  2. The tab portion is added to your bill

For example, take a $50 monthly fee with a 10% ‘tab’ attribution. This could mean that you pay $50 a month flat, and $5 goes to paying down your tab. Or it could mean that you end up paying $55 per month, with $5 going towards paying down your tab. Be sure to check the terms and conditions with your provider before moving to tab. Since tabs are usually percentage based, you don’t want any surprises on your bill (especially if you have a bigger plan).

If you ever wanted to leave the carrier before your tab was paid off, you simply have to pay it off in full when you leave. There are no cancellation fees (in most cases).


What the shift to tab means for consumers

By removing forced loyalty as the key anchor for device discounts, tab has empowered mobile customers with more choice. You don’t have to stick around with a carrier if you don’t want to, but in the meantime you get a steeply discounted phone. Since mobile carriers make the majority of their profits from ongoing, lifetime revenues, companies are incentivized to offer better service to customers – they won’t profit much if you pay out your tab and leave.

But tabs also present a problem for consumers: they scale up and down based on your bill size. So if you want an expensive phone but don’t want a super-expensive monthly plan, a reasonably priced $50 monthly plan can quickly become a $100 monthly bill with the other $50 paying off your tab. Of course, consumers always have the option to pay off their tab in full, but this can be a challenge for those who don’t have hundreds of dollars in spare cash.

Despite this issue, though, tabs created a fundamental shift in the mobile world: it forced mobile companies to care more about their consumers by giving consumers more choice to stay – or leave – if they didn’t like what was happening. In a country like Canada, which still boasts some of the most expensive mobile plans in the world, even an ounce of choice can make a big impact.