FT.com
September 3, 2013 4:06 pm
By John Kay
Many companies now penalise rather than reward loyalty
I was travelling abroad last week. The car hire company
quoted a low price, only to reveal at the desk that compulsory extras added
about 60 per cent. My aggravation was increased by the airport hotel. Its free
shuttle swept you rapidly from the terminal to reception. Only then did the
hotel reveal that there was a charge to take the shuttle back to the airport.
The car hire assistant, genuinely helpful, pointed out that
the vehicle was probably available more cheaply at the desk of one of her
company’s competitors. But the company knows few people arriving late at an
airport will be inclined to shop around. That is why the online price for
advance bookings – where there is easy comparison and vigorous competition – is
typically much lower than the walk-up price. Similarly, the hotel knows that
few people, however angry, will walk back to the terminal carrying their
luggage.
All this was before the hire company tried to add
ridiculously overpriced insurance. And before the hotel charged €20 for a
coffee and croissant in the morning. Travellers have always been resigned to
being ripped off. There is a premium to be paid for buying things in an
unfamiliar environment that you will probably not visit again.
But the problem – which I am inclined to describe as petty
fraud – is no longer experienced only by those who are passing through. Most
insurance companies now penalise rather than reward your loyalty. They charge
existing customers more than new ones. Printers are cheap to buy but consumables
are extremely expensive. To assemble a car from individually purchased spare
parts would cost many times the price of the complete vehicle.
Modern life involves complex and multidimensional products.
It is perhaps inevitable that price structures appear similarly complex and
multidimensional. The consumer has neither capacity nor time to devote
attention to the detail of these tariffs. The producer has every incentive to
do so. The result is that consumers end up paying more than they expected or
intended.
The profuse availability of information online may have made
the problem worse. Businesses aim to achieve top ranking on a comparator site.
That is how I chose the car hire company – and the assistant at the desk was
well accustomed to customers who felt cheated but purchased anyway.
Once, market forces and the power of brands and reputation
provided reassurance. Many businesses took a long-term view and valued their
customers’ loyalty. But a more opportunistic outlook on the part of big
companies means that, in many markets, reputations have fallen so low that
consumers expect nothing and get little. All the petty frauds I have described
were perpetrated by well known companies.
In these circumstances, competition is no longer the answer
to the problem of tariff complexity but a means of spreading the practice of
petty fraud. The company that offers a fair price loses business to the company
that provides the misleading tariff.
In the UK, payment protection insurance involved marketing
policies to bank borrowers and credit card users that were unlikely to pay out
much, if anything. The abuse was dealt with by the Competition Commission
(significantly, the Financial Services Authority came to the issue only late in
the game). Yet it was not the absence of competition but its effectiveness that
was the essence of the problem. The chance to earn profits from insurance led
to aggressive pricing of the associated loans, forcing them to levels at which
the core activity was barely profitable. Banks had to sell these useless
products to stay in the lending business even if more thoughtful executives
(there were some) wanted to refrain.
Similarly, my car rental company could not have made
economic sense of the rate it quoted. But its tactics put pressure on others to
appear to match their prices. Once such behaviour becomes general, it is no
longer possible for companies to compete honestly. Paradoxically, both
businesses and the public would be better served if there were an (illegal)
agreement to collude.
Tariff opacity is today the biggest concern in consumer
protection – and the principal challenge facing the Competition and Markets
Authority, which begins operations next year. Dealing with it requires a
fundamental rethinking of our understanding of competition.
johnkay@johnkay.com
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