How Companies Exploit Customer Loyalty & Inertia (& How to Stop Them)
One of the most frustrating feelings as a consumer in a capitalistic economy inevitably comes when a company raises a price on you. You've stuck with a company despite the flaws of their product, despite their poor service, even though alternatives are available - and what do you get in return for your loyalty? Big price hikes, fat, disloyal, insulting.
To add insult to injury, often the same company that just raised its price on you is offering new, unfaithful bums at super sexy prices and offers you haven't seen in years, if ever. Even if you ask nicely, you won't get the same offer – even on your birthday. I have shocking news for you: the company doesn't like you.
The bad news is that this will happen to you again and again, over and over again in your consumer journey, and it's unlikely to feel any better the next time around. The good news is that you can take action to flip the script and beat them at their own game.
Why Customer Loyalty Doesn't Go Two Ways
Having worked in marketing and advertising for more than a decade, consulting with some of the world's largest companies, while also keeping up with consumer, business, and investment trends, I have seen a number of trends run counter to today's loyal consumers. :
Customer acquisition takes priority over customer loyalty: Companies often build massive customer acquisition channels through their marketing and advertising departments, affiliate partners, and external agencies – and all are incentivized to acquire new customers, often with “cost per acquisition” or “CPA” targets in mind. Customer loyalty and retention are not given nearly the same attention or value, and there is rarely any value for money or incentives provided to retain customers.
Investors appreciate the number of subscribers and revenue growth: The number of active subscribers and revenue growth (through new customers and raising prices on existing customers) are typically valued more than any other metric by investors.
More and more companies are deliberately shifting from a one-time purchase pricing model to a subscription-based model. They do this because, as I explained in the article 'how to cut video streaming subscription fees',
Recurring subscriptions are easy to subscribe to and even easier to forget. If we don't have a regular habit of canceling it, we often just subscribe.
It is called "inertia". The company is ready on it. We live busy lives and we hate change. It's much easier for a company to get us to give them our credit card once and stay in place than it is to have us make the decision to pick them again and again, every time we go to the market.
Customers switch with price in their mind: possible because they are tired of one-way loyalty and price increases, when consumers is In the market for something new, price is often the main deciding factor in a purchase consideration. This is why companies offer lower rates to new customers than they do to existing customers.
Just think about how often you've been immediately offered a discount or promotional rate as a new customer, only to see your rates go up over time. Some of the most common examples of this occur in the following business categories:
- Phone service
- Insurance (home, car, umbrella, renter)
- Cable TV service
- banking services
- Digital/print media subscription
- Video and audio streaming services
- Software subscription
- Video game subscription service
- internet service
- Credit card
- Discount club membership
- Subscription mailbox service
- Almost every other subscription based service these days
All of this leads to new customers being offered attractive promotional prices and existing customers seeing their prices go up. The meeting room theory is “bring them to the door at a promotional price, then let loyalty and inertia do their thing”.
How was the company able to offer such low rates to new customers? Because loyal customers subsidize new customers. Bold for emphasis, because I want you to really let it sink in. If you are a loyal customer who has seen your rates go up while new customers to the same company get significantly better rates, you are subsidizing the lower rates for those new customers with your higher rates. Maybe you're okay with that. I do not. So, what can you do?
We've determined that consumer loyalty and indolence cost you, so it makes sense that the opposite (disloyalty and action) could work in your favor and help you reverse the scenario. How can you do that?
You have 2 options:
- negotiate a better price
- switch to get a better price
Granted, this isn't a new "breakthrough" strategy in the personal finance game, but hopefully you now see how important this tried and true tactic is to beating the recent trend of business monetization, if you want to keep your spending in check.
Negotiate or Switch to Beat Loyal Customer Inertia & Exploitation
Negotiation Route: If you are good with your current employer, you can start the negotiation route, especially if you think their offer is better than the alternative (other than your current price). Over the years, I've done this several times with ISPs, insurance companies, and media subscription services. I shared a Comcast negotiation script with readers a few years ago, but in general, you should be prepared by researching the following into any of these interactions:
- Are there competing alternatives and what are the costs?
- Can you leave and come back later for a better rate? What rates are available for new customers?
Your best course of action is to initiate the interaction by saying “I want to cancel my service” and see where things go from there. When asked why, “I didn't get enough value for the price” is my response. Many companies will have customer service representatives dedicated to keeping customers with one foot out the door who can make offers that standard customer service representatives cannot.
Transfer Route: If you don't like the company you work for (and even if you do), switching periodically will usually get you the best price. You can always start with the negotiation route to see what kind of offer you get and if it's not better than the rate offered to you to switch, then proceed with canceling and switching. I recently did this switching high speed internet from Comcast to AT&T Fiber and ended up with faster service for the same rate as $300 in a prepaid Visa gift card added to the switch and no contract to lock me out. I also recently temporarily switched my cellular service for travel and received enough Google Fi referrals and promotional credits to pay for months of service (also no contact to lock me out).
Even if I'm not currently in the market to make a switch, I'll periodically check to see what the competition has to offer. That way, I will know if I will get the best deal
if when it comes time to make the switch.
How often should you Negotiate or Switch?
Whenever I sign up for a new service, I usually set a calendar reminder for a future month or year date i.e. a date I know my rates will increase. Often that is expressly stated somewhere in the terms of service (eg 1 month, 90 days, after the first year) or annually for some companies (eg insurance).
I also recommend creating a spreadsheet of any recurring expenses you have, the rate you paid (and when it went up if it was an al rate), and competitive alternative prices you can use to switch promotions.
The point here is that companies are just a line to lean on this trend. You have choices about how to respond as a consumer:
- Let the company win by doing nothing and paying the highest price
- Take action and periodically negotiate or switch to pay the lowest price, and beat them at their own game
The choice is yours.