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It’s a common complaint made by consumers: “How come I can get a cheaper price from the same provider than what I’m currently paying as a loyal customer of many years?”
Many providers know that switching can be difficult. They also believe “why offer a lower price to retain a customer if they are happy with our product/service?”
This price gap is the ubiquitous ‘loyalty tax’. It is not a tax in the traditional sense – it won’t appear on an invoice. It’s the cost difference between what a loyal customer pays year after year, and what a NEW customer pays when they buy the same service. The gap can be enormous, as the following UK and Australian examples testify.
• In the UK, the Financial Conduct Authority (FCA) said that new car insurance premiums were an average of £285 per year, while customers who had been with their provider for more than five years were paying £370 per year. That’s a gap of 30%.
• The FCA also analysed the home insurance market where new customers paid £165 a year for buildings and contents cover, while after five years premiums had increased to £287. A whopping 74% gap!
• Research by the NSW government’s Insurance Monitor showed customers renewing their insurance policy paid 34% more than new customers.
• According to the Home Loan Price Inquiry conducted by the Australian Competition and Consumer Commission (ACCC), the average difference in interest rates paid by new and existing variable rate customers, at September 2020, was 0.3% for borrowers with home loans under 1 year old, and up to 1.04% for borrowers with home loans greater than 10 years old.
• According to a Canstar survey, 65% of Australians accepted their increased insurance policy premium without question.
Most research indicates that at least 75% of consumers stay with their current provider for many years.
How to negotiate a better deal
Firstly, understand that asking for a lower price is not something to be embarrassed about. Be confident that you are the CUSTOMER and therefore very important to the service provider.
Secondly, work out what really is the best/lowest price for the service you are receiving. If you don’t know what is the value of something, it’s impossible to calculate whether you are getting good value for what you’re paying. So do some research to kick the process off, including checking your own needs so you can compare ‘apples with apples’.
Thirdly, choose how you want to contact the provider. There are 3 basic approaches – phone, email or live chat. The phone is the most direct way but can be more intimidating for some. Live Chat is becoming very popular, as it also allows you easily to be checking information and prices online whilst chatting to the operator.
Lastly, always start by talking to your existing provider. You never know what deal they will offer you until you ask. And it just might save the extra effort of giving your personal information (again) to a new provider.
How to avoid paying it
Some simple tips to avoid paying the ‘loyalty tax’.
1. Know when it’s the right time to do your shopping around. Ideally, as you near the expiry of your existing contract or plan. For long term commitments like a mortgage, review your interest rate every two to three years especially in a low interest rate market.
2. Allocate some time to shop around. It doesn’t need to take hours. Usually, a 15 minute online search will arm you with enough pricing options to contact the current provider and ask what can they do.
3. Have realistic price expectations.
And when your actions actually lead to saving money, bask in the wonderful sense of personal satisfaction and stop paying the ‘loyalty tax’ ever again 🙂
How GetReminded can help
Download the app from Apple or Google Play. Set up reminders for all your personal, family and household expenses. And get the added bonus of being informed about great deals in the market. It really is the way to never overpay.
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