The loyalty penalty and how to avoid it

What is a loyalty penalty?

A loyalty penalty refers to the practice of companies charging their long-term customers higher prices or fees for their products or services than new customers or those who have recently switched providers. This penalty is often applied to customers who have been with a company for a long time and are less likely to switch to a competitor, as they may feel loyal to the brand or perceive that it is too much hassle to change.

The loyalty penalty is typically applied to a range of industries, including utilities, insurance, banking, telecommunications, and retail. It can be a significant financial burden for loyal customers, who may end up paying hundreds or even thousands of pounds more per year than new customers for the same product or service.

The practice of the loyalty penalty has been criticised for being unfair to customers and for discouraging competition in the marketplace. Some government and consumer advocacy groups have taken action to address this issue, by introducing regulations or campaigning for companies to provide fairer pricing structures to all customers.

Price walking

Linked with the ‘loyalty penalty’, price walking, also known as ‘stepped pricing’ or ‘sliding scale pricing’, is a pricing strategy used by companies to increase the price of a product or service over time, usually on a regular basis.

With price walking, the initial price of a product or service is set relatively low to attract customers, but then the price is gradually increased over time. This can be done through a variety of methods, such as by increasing the price after a certain period of time, after a certain quantity or level of usage, or after a promotional period has ended.

The idea behind price walking is to take advantage of customer inertia and the reluctance to switch providers or products by gradually increasing the price, without causing too much customer backlash. Price walking can be particularly effective in markets where there are few competitors or where customers find it difficult to compare prices or switch providers, such as in the utility or insurance sectors.

However, price walking can also be controversial, as it can lead to customers paying significantly more than they would if they switched providers or products, particularly if they are not aware of the price increases or don’t fully understand the pricing structure. As a result, regulators and consumer advocacy groups have called for greater transparency and regulation of price walking practices.

What does the loyalty penalty cost us?

The cost of the loyalty penalty varies depending on the industry and the product or service. However, research has shown that the loyalty penalty can be significant and cost consumers hundreds or even thousands of pounds per year.

For example, in the UK, the Competition and Markets Authority (CMA) estimated that the loyalty penalty is costing consumers around £4 billion per year in the insurance, savings, and mortgage markets alone. In the telecommunications industry, a study by Citizens Advice found that loyal customers pay on average £270 more per year for their broadband, mobile, and TV services than new customers.

Similarly, in the energy industry, a report by the UK government found that loyal customers pay on average £350 more per year for their energy bills than new customers. In the banking sector, the CMA estimated that consumers are collectively losing out on £1.2 billion per year due to the loyalty penalty.

To really put it in perspective, Citizens Advice estimates that people can be paying an extra £877 per year across five major industries, including insurance.

Citizen complaint

In 2018, Citizens Advice, a UK consumer rights charity that aims to provide free, independent, and confidential advice to people on a range of issues raised a "super-complaint" with the Competition and Markets Authority (CMA) regarding the "loyalty penalty" in five essential markets - mobile, broadband, cash savings, home insurance and mortgages.

Citizens Advice found that customers who stay with their providers for a long time end up paying significantly more than those who switch providers regularly, with some paying as much as £1,000 a year extra.

Citizens Advice argued that this practice was unfair and that it was harming vulnerable customers, such as the elderly or those on low incomes, who are less likely to switch providers. They also claimed that the loyalty penalty was stifling competition in the markets and that it was undermining consumer trust.

The super-complaint process is a legal mechanism that allows designated consumer bodies to raise concerns about aspects of a market that they believe are significantly harming the interests of consumers.

In December 2018, the CMA announced that it had accepted the super-complaint and would be launching an investigation into the loyalty penalty in the mobile, broadband, and home insurance markets. The investigation concluded in December 2019, and the CMA issued a series of recommendations to address the issue, including measures to increase transparency and to make it easier for customers to switch providers.

In December 2020, the CMA issued an update into progress in addressing the loyalty penalty across five markets. On insurance in particular the CMA said that it had raised serious concerns about practices in the insurance sector where businesses were repeatedly increasing prices year on year leading to some customers paying much more than others. They also reported that the Financial Conduct Authority (FCA) had carried out an in-depth market study into general insurance pricing practices (including home and motor insurance), publishing its final report in September 2020. It found that six million policyholders paid high prices in 2018 and could’ve saved £1.2 billion.

How can I avoid the loyalty penalty?

There are several ways to avoid the loyalty penalty:

• Shop around: Before renewing your contract or subscription, compare prices and deals from other providers in the market. You may find a better offer that is cheaper or more suitable for your needs
• Negotiate: If you want to stay with your current provider, try negotiating a better deal or price. Highlight the loyalty you have shown to the company and see if they are willing to match or beat a competitor's offer
• Switch: Consider switching to a different provider or product altogether. This may require some effort, but the savings could be significant in the long run
• Stay informed: Keep up-to-date with any changes to your contract or subscription, such as price increases or changes to terms and conditions. This will help you make informed decisions about whether to renew or switch providers
• Be willing to walk away: If your provider is not willing to offer you a better deal, be prepared to walk away. Remember that loyalty should be a two-way street, and you deserve to be rewarded for your loyalty with fair pricing and quality service.

By taking these steps, you can avoid the loyalty penalty and ensure that you are getting the best possible deal for your money.

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