What’s the true cost of loyalty for consumers?
We often think of loyalty as a desirable trait. We think of it as something we should encourage — even reward. This is true not only in our friendships and personal relationships. Many of us also participate in loyalty schemes run by companies, such as Sainsbury’s, Tesco or British Airways, to take advantage of the discounts this can bring.
But across essential markets, we see quite a different response to loyalty. Huge numbers of consumers across sectors including energy, insurance, banking, and telecoms, are on uncompetitive deals. Often they are paying far more for a service than new customers would.
In energy, for example, customers can face a loyalty penalty of almost £300 a year. And customers who have stayed with the same provider for over 15 years face a penalty of over £3,000.
The cost of staying loyal to your energy provider
In telecoms, we see people being similarly penalised. The average broadband package increases by nearly £70 at the end of a minimum contract term. And in home insurance, consumers who stick with the same provider for 5 years pay on average 70% more than a new customer would for the same deal.
So why is this happening and should we be concerned?
Many people don’t expect to be penalised for their loyalty. And they certainly don’t think this should be happening in a well-functioning and fairly operating market. In a recent survey of our network, 77% of our staff and volunteers agreed that there is low awareness of the higher charges consumers face when they stick with the same provider. As one adviser explained:
“Clients are unaware that when the specific tariff ends they often default to the most expensive standard tariff. Often brand loyalty impacts on clients’ choices.”
Because it’s one thing to recognise that new, cheaper deals may come onto the market — this is an important part of competition in the market. But it’s another thing to realise that you’re paying more for the exact same product simply because of the length of time you’ve been with them. This jars with how people expect their provider to treat them.
The loyalty penalty is especially worrying given that consumers in vulnerable positions are more likely to be loyal. For example, only 12% of energy customers in the lowest income brackets are on the cheapest tariff and 74% have never switched. In contrast, 70% of the highest earners are on the cheapest deals and only 29% have never switched.
Frustratingly, even those who shopped around are subject to these penalties, sometimes with serious consequences later on. As one respondent to our recent survey explained:
“[A] deal appears cheaper and a client has a low monthly repayment to start with and then it increases and they can get into debt”
So what’s the solution?
There’s been lots of focus in recent years on making it easier for consumers to switch and this is no doubt part of the answer. Encouraging consumers to consider their options and simplifying the switching process can help people to access better deals. But it would be a mistake to think this was the only answer.
Consumers today face a bewildering array of decisions, demanding ever more of their time. As we’ve previously argued, policy makers need to recognise that ‘just about managing’ is not just about the pounds in your pocket — it is also about the number of spare hours you have in the day. It’s no surprise therefore that people take short-cuts or fall back on (sometimes outdated) rules of thumb. People don’t want to spend their time continuously shopping around. They want it to be simpler and easier to make the right choice.
But for too long, the focus of interventions has only been on shifting consumer behaviour rather than also looking at ways to shift provider behaviour. The focus assumes that customer loyalty is a negative feature of the market and that shopping around more is always a positive thing. But as our recent research shows, consumers actually feel less satisfied when they spend a ‘good’ amount of time reaching a decision.
At Citizens Advice, we are undertaking new research to explore how consumers can be better protected from the loyalty penalty. Greg Clark, Energy Minister, has expressed concern that energy companies are punishing customers for their loyalty. We’re calling on the government to make energy companies switch loyal low income customers to a cheaper deal. Because it’s not right that those who would benefit the most from cheaper deals are the most likely to be on the highest tariff.
We’re also launching a new project which is focused on shifting energy supplier behavior. Our Mind the Gap project will highlight the differences between suppliers’ cheapest and most expensive deals and focus attention on the percentage of their customer base on the standard variable tariff.
And finally, we’re also taking a wider look at other essential markets to see how these protections can be extended. The Green Paper on consumer policy, announced in the Autumn Statement, provides a good opportunity to rebalance the scales in favour of hard-pressed consumers and stop the loyalty penalty.
