The loyalty penalty

In the UK, one organisation is aiming to stop companies from overcharging loyal customers. Its calculations have found that by staying with the same providers for utilities, Brits are paying an additional £877 each year, for a total of £4.1 billion annually.

What’s surprising about all this is that a) we all know about this, b) we don’t expect anything to be done about it and c) we still don’t shop around much. What we take for granted as just the way things are done, the UK Citizens Advice calls a ‘systematic scam’.

The situation is exactly the same in New Zealand, where companies lower their prices and offer incentives that are only available to new customers. You are rewarded for switching suppliers regularly and penalised for remaining loyal. It’s insane because the cost of retaining an existing customer is far lower than campaigning for a new one.

And on top of all this, there are numerous reports accusing Millennials of having no brand loyalty; someone in this story characterises them as ‘promiscuous’. What’s promiscuous about avoiding a penalty? It’s essentially the most economically rational and predictable action you can take.

You’ll notice the largest penalty by cost is the one associated with paying a mortgage. If you are a homeowner with a mortgage, I urge you to take this cost seriously. Most people fall into the trap of not thinking about their mortgage renewal until the last minute, then when the bank calls with an offer, they feel time-pressured to take it, without even knowing whether it’s a good offer or what would happen if they didn’t sort something out by the end of the fixed term.

Every time your fixed term comes up for renewal, you should be using a good broker to help you shop around for the best deal. If you leave it too late, consider whether paying for a month or two of floating rates would be worthwhile if you can get a cashback or other excellent discount from a new lender. It will take you some time, but that time could be paid back at a rate that far outstrips your usually hourly wage. I estimate my most recent mortgage changeover left me $8,000 better off over two years, and it probably took me about five hours to organise in total. That’s an outstanding return on my time.

Try not to pay too many loyalty penalties because over your lifetime these are seriously eating into your disposable income. I’m sure you’ve got better things to do with your money than hand it over to your utility providers for absolutely no value.