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5 October 2018

What is the Loyalty Penalty?

Imagine you go to your regular supermarket with your best friend who usually shops elsewhere. You buy a bottle of the same wine each but your supermarket charges you twice as much as they charge your friend. It sounds outrageous but that is exactly what is happening every day for the broadband, energy, TV, breakdown, insurance and mobile bills we cover.

The amount you pay can depend on how loyal you’ve been to your provider. If you joined on a promotional offer then after a time you could have been moved to a standard tariff and then you could have had ten years worth of price hikes added to your bill. At the same time, services that might have been premium when you signed up are now given away to new customers for free. That is the penalty you pay for being a loyal customer.

We don’t think that is fair so we created ismybillfair to help people to check their bills and challenge their providers.

How do providers get away with charging different prices for the same product or package?

When we created ismybillfair, we had one simple goal in mind: To provide better solutions to help people get a fairer deal on household bills and beat loyalty penalty. Our research told us that 79% of people would rather stay with their existing provider rather than having to switch, so we decided to offer “Stay” and “Switch” options. And, to make it clear whether you need to take action either way, we created the Priceometer process to show you whether your bill is fair – i.e. how your price compares to what other people pay the same provider for the same product or package.

Why do big companies - whether they provide us with energy, telecoms, broadband, car breakdown or anything else – charge different people different prices for the same thing; and how do they get away with it?

There are two basic answers to the “why” question:

1) Because they want to maximise revenue and profits (in fact they have a duty to their own shareholders to do so)

2) Because of inertia and lack of understanding amongst their customers means that they can keep doing this for years without hurting their profits

How do they get away with it?

They know that a some of their customers are likely to object to a higher price, and subsequently complain or switch away to another provider; whilst at the other end of the spectrum other customers are unlikely to react. Big companies refer to this as price elasticity or price sensitivity. What’s more, they have teams who regularly calculate where on this spectrum each individual customer sits – and then set our individual prices accordingly.

The goal is to squeeze as much as possible out of each customer – but without pushing too far, to the point where the customer complains, or leaves. Not only do these companies employ their own in-house experts to make these calculations and “score” each customer, there is an army of consultancy companies who get brought in to help with the task. Just enter “pricing strategy consultant” into any search engine!

What strategies and techniques do they use to do this?

So, if the goal is to squeeze as much as possible out of each customer, how do these providers go about it? At a simple level, there are four main techniques – all of which in isolation result in different prices for the same package, and together result in the dramatic range of pricing which we are now exposing with the ismybillfair Priceometer:

1. Short term discounts and offers

This is probably the best known technique, because we are all used to seeing it in service provider advertising – for example “join today on package XYZ for £30 per month for the first 12 months”. The whole idea is to get non-customers take notice of what looks like a cracking deal. Only in the small print, and often only later do we realise, that the price from month 13 is much higher. The big companies calculate that even if some people object to the jump in price at month 13, many more won’t take any action, and they can get away with it. This technique isn’t just used when new customers join – it is also used to sell extra services to existing customers.

2. Price increases for existing customers

We are all used to getting a letter each year (in fact often much more frequently than once a year) informing us that “due to rising costs, the price of your package will be going up by X% from next month”. This often contains a line or two about some new “sweeteners” to mitigate the impact, e.g. “we’re bringing you some extra content, or a faster speed, or extra cover….”. It is cleverly written, so that most of us accept that “not only is it reasonable for them to cover their increasing costs, we must all be getting the same X%, right?”. Wrong. In many categories, service providers will apply different % increases to different people – based on the price elasticity models mentioned above. You may be getting a 6% increase, but your neighbour who is with the same company may only be getting a 2% increase.

3. Legacy packages

Companies regularly update the range of packages that they promote to new customers, and feature on their websites and in shop windows, in order to stay ahead of the competition. This usually involves not just a change of price, but also new or improved features, such as new hardware, a bigger data allowance, or some kind of accident cover included. In fact., improvements can “trickle down” within a product range, so a feature that was previously only available on the highest package is made available at much lower price points. That has to be a good thing, right? Not necessarily, because whilst the new packages are made available to new joining customers, existing customers are left on the old packages. In effect many are left paying the higher prices, but for old packages (also known as “legacy packages” or “Backbook”) which contain the same products and features that are now available more cheaply in the new product range

4. Retention discounts

Finally, prices get individually adjusted every day when existing customers call their provider and ask for a better deal. Most people never do this – we created ismybillfair to do this on behalf of those who lack the confidence to do so – but every day thousands do call the “retention team” and ask for a better deal. What isn’t well known is that call centre agents in retention teams are empowered to offer a range of different discounts and incentives, so each caller may end up with a different package/price combination, even if they were paying the same when they called in. Of course, all of these different prices are better than those paid by the silent majority who aren’t pushing for a better deal.

Are your gas, electricity and broadband bills too high?

So what is the combined effect of all of these strategies? In short, it is a huge variance in pricing, for the same package. Some people may be paying two or three times what others pay for the same thing. Here is an example:

  1. A service company invents a package and decides to sell it for £60 per month
  2. They introduce a “new joiner offer – pay £40pcm for the first 12 months, on a 12 month contract” – so that creates a range of 40-60
  3. An annual price increase takes place, with people receiving between 1% and 10% increases. BUT the headline £40 offer price is retained. This takes the range to 40-66, with multiple additional price points of 61, 62, 63 etc.
  4. Some customers complain and are given retention discounts: The range stays at 40-66, but new discounted price points appear, eg 45, 50, 55.
  5. A further annual increase stretches the range so it is now 40-72
  6. Two years later, a new package is introduced with the same products and features, with a headline offer price of £30 and an ongoing price of £47
  7. So now, the company has customers getting the same products and features, paying 30, 40, 45, 47, 50, 55, 61, and every increment up to 72.

We hope that gives some background as to how pricing and loyalty penelties in big companies works. It is complicated – in fact very sophisticated – and of course most of this is hidden because companies want to continue taking advantage of the inertia in the market and keep you in the dark! But with, for the first time you can see within 60 seconds whether your price is fair – and then get a fairer deal whether or not you want to switch. Let’s get started – check your bill.

Is your bill fair?

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