Loyalty’s For Losers
Did you know that companies exploit your loyalty?
You’d think it was the other way around. In a “normal” world, companies would offer incentives to people for staying with them over time.
For example, your insurance costs would reduce, or you’d get a gradually better deal on your gas or cell phone because you’d been with the company for a few years.
The opposite is actually true.
Why Do Companies Reward Disloyalty?
There’s a reason for this, and it’s to do with how we make decisions.
Let’s say you’re about to buy new home contents insurance and you see two different offers. One of them has loyalty incentives that will gradually reduce your costs by 30% over five years. The other costs 15% less today. Which do you go for?
The answer, for most people, is the second option. People prefer to pay less today than save more later.
There’s another reason people stick with expensive providers: Customer stickiness, which is something companies measure carefully when considering their pricing models.
A customer is sticky because it’s a hassle to change provider. The example here is that you already have home contents insurance. There’s a chance you could save a little money if you spent some time shopping around, but getting home contents insurance is a chore, it involves filling out long questionnaires and you can’t be bothered, so you’ll pay your renewal fee even though you suspect there’s a better deal to be had out there somewhere.
The result of all this is a system that rewards disloyalty.
You will almost always find a cheaper alternative if you shop around, even if the deal you currently have was the best in the market a year ago, when you signed up for it.
This is because new contracts benefit from new customer discounts and other efforts and rebates made in the name of customer acquisition, and the market for many of these services fluctuates over time so that the most competitive provider at any one time doesn’t stay there for long.
Which Companies Reward Disloyalty?
Typically it’s the service companies and anyone who sells an automatically-renewable contract, so
- Gas and Electricity Providers
- Home Contents Insurance
- Car Insurance
- Mortgage Providers
- Savings Accounts
- Home Internet (Broadband)
- Cell Phone Contracts
You should regularly check that these contracts remain competitive, and you should resist the urge to sign 2-year deals or longer just because they provide a small discount in return – remember, they’re doing this to help themselves, not you.
What’s Being Done About It?
Those of us who think a lot about economics and finance have known about this for a while, but it’s hard to get people’s attention.
There’s a whole industry that exists around the deregulated (privatized) utilities that helps us switch from one to the other based on which provides the best service for the lowest cost. Specialized websites exist to help us find the cheapest provider and make switching as painless as possible.
Regulators that once enforced public monopolies are now more enlightened and focus on the lowering of barriers to switching. That’s why if you change your bank today, you can have all your direct debits and standing orders transferred to your new bank, painlessly and free of charge. It’s also why, if you’re in the UK and you change cell phone provider, you have guaranteed number portability so you can keep your old cell phone number. That makes switching easy, which in turn makes it harder for banks to rely on customer stickiness to maintain a price skimming strategy.
It’s also in the news, as you can see from the screenshot above. In September 2018, a consumer group has triggered an investigation into this behavior in a number of industries in the UK. The practice is somewhat more accepted in the US, which is why if you’re in the United States, you should vote with your wallet and switch as often as you need to.
What Should You Do Now?
You may find there are some significant savings you can make with only a couple of hours of effort.