Imagine you’re thinking about whether to switch your broadband provider. You’ve seen various offers advertised, and reckon you could save money.
Sounds simple. But before signing up to a new deal you’ll need to:
- Consider whether it is worth staying loyal to your current provider. Will you lose existing customer discounts? Could you lose your email address? Will the new WiFi signal be less reliable?
- Navigate your way through a huge array of complex deals, comparing different discounts, perks (e.g. free music subscription), bundles (e.g. telephone, mobile and broadband), speeds and prices.
- Handle the switch-over logistics, including taking time off work for the installation, and making sure your new provider times your cancellation correctly so you’re not left without broadband or paying for two connections simultaneously. Do you need to find time to return the old WiFi router?
And, even if you make it through that process, you’ll probably need to do it again in 12-18 months time if you’d like to keep saving money!
This experience is typical not just with broadband, but also in other essential markets such as savings accounts, home insurance, mobile, and mortgages. We recently collaborated with Citizens Advice on research that found that consumers who do not shop around and switch deals face a ‘loyalty penalty’, which can add up to £877 a year onto their bills for these basic services.
The Competition and Markets Authority (CMA) is due to respond to the ‘super-complaint’ Citizens Advice submitted on this issue tomorrow.
Understanding the loyalty penalty
Loyalty has positive connotations. We often assume that consumers are loyal to a brand or supplier because they trust them, are getting good service and are rewarded with good deals. That is the case where the market is functioning well but, as Citizens Advice point out, there are many other factors that keep consumers in essential services contracts even where they are not getting good deals.
At the Behavioural Insights Team, we are interested in the psychological factors that keep us tied to our current deal even where it means we lose out on savings. In other words, how can behavioural science help us understand, and address, the loyalty penalty?
Many consumers stay loyal for the wrong reasons
Discounts for existing customers are commonplace. If you’re an existing mobile customer, you may get offered a discounted handset upgrade. If you have car insurance with a provider, they may offer you cheaper home insurance if you stick with them.
For these deals, loyalty appears to pay – at least for a while. But by the time of renewal, these discounts are usually withdrawn and, with this, the price increases. At this point, consumers should start considering switching. So why do many of us remain loyal?
Reciprocity is a strong determinant on our behaviour – we are predisposed to reward kind actions and punish bad one. The initial reward for our loyalty in the form of a discount may act to build trust with the provider, develop brand loyalty and, importantly, elicit reciprocity.
We are also averse to regret, and might therefore stay with our current provider out of a fear that switching will cause regret in the future. For example, we might regret missing out on future loyalty rewards, or we might regret switching if the new provider turns out to be worse than our current one.
Comparing deals is difficult
Searching for and comparing deals can be confusing: services such as broadband or home insurance can have many features, products can be bundled together (such as broadband, mobile and TV), and some offers can be dependent on using the supplier for other services.
Take savings accounts, for example. When comparing deals you have to consider questions such as:
- Which type of savings account to open? Fixed-rate? If so, how many years? Individual Savings Account? If so, what kind? Instant-access?
- Which suppliers offer the chosen type of savings account, and how do their features differ? For example, do suppliers charge any fees? What interest rate do they pay? Is there a required minimum deposit amount? How good is their customer service?
- Does the chosen savings account make you better off than your current deal, given the amount of savings you currently have and the amount you plan to save?
These questions directly affect our ability to get a good deal: too many options can bring about “choice overload” and lead us to make poor decisions, or postpone making a decision at all, meaning we miss out on the best deal. Searching for deals online leads us to disproportionately click on the first few results, meaning we compare fewer options than we ideally should. And discounts can be tempting and confusing: the Australian Energy Regulator found in an experiment that more than 1 in 10 consumers chose a plan that was objectively not the best option, seemingly because it had a higher discount on usage.
Friction and fees wear us down
Once you have found a deal that is right for you, it doesn’t become easier. Actually switching your deal is a process laden unwelcome hassle. For example:
- When ordering a new broadband router, you often have to ensure that you are around for its delivery and take time to return your old one.
- When switching household insurance providers, you may have to re-list all of your household possessions over a certain value.
- To close a savings account, you generally have to do so in person or over the phone, with no option to do it online.
This ‘friction’ is important since processes that require even small amounts of effort can be enough to discourage us from switching. Many of us are time-poor and are unable to dedicate large amounts of time to these tasks. Additionally, we are subject to cognitive overload – when faced with too many tasks, we find it hard to process and action them. The effect of these frictions, both in isolation and throughout the process, makes switching a challenging activity.
Renewal periods catch people out
Renewal time is important. It presents the first opportunity to switch without fees and to maximise any savings subsequently incurred. To draw our attention to our renewal date, service provides will generally provide a renewal notice 21-28 days before our contract period is due to end. This should be a timely and helpful prompt to switch, right? Well:
- Some customers are still not being notified about their renewal date. In such cases, the onus falls solely on the customer to ensure that they remember and plan for it.
- If your notice is late, you may miss out on savings. The best time to switch your car insurance, for example, is 21 days before your renewal date – you can save up to £567 relative to switching on your renewal date.
- Renewal notices contain little helpful information in the way of alternative options. Mobile notices, for example, rarely highlight cheaper sim-only deals, even though three out of four mobile customers are unaware of them.
So renewal notices are generally not timely or helpful. While we may be confident that we will find the best deal ourselves when renewal time arrives, or simply remember to switch at the end of our contract period, in reality, we will often fail to do so and are defaulted onto expensive rolling contracts. Renewal notices could, and should, provide a timely and helpful medium to prompt us to switch and to leave us better informed about our options.
So what should the CMA do about the loyalty penalty?
This week’s response from the CMA is an important opportunity to highlight the downsides of loyalty from a consumer perspective. It’s right that more attention is being paid to this important consumer issue, and we look forward to seeing the CMA’s response.
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