Teaser pricing is a common route to attract customers, over time the need to provide value for customers has had to become balanced against the need to subsidise new customer acquisition costs.
We are all familiar with the retail “teasers” for a daily coffee or a discount on our weekly shop and we expect our loyalty to be rewarded. We are accustomed to using our loyalty cards; however, the situation is very different in financial services.
With everything from “teaser” rates on savings to initial interest-free periods on credit, it can be those customers who shop around who end up getting better deals. However, in financial services customers can feel they are being penalised for being loyal. Prices and rates for existing customers can sometimes be higher than those for new customers and retail models don’t have the complexities that the financial services industry has to navigate.
All industries use teaser pricing, the practice of pricing a few products below market rate to bring in customers whilst pricing all other items at market rate. Service propositions are also key with the provision of a basic service for free with a fee for a higher-level service.
With so many considerations, price led propositions can be seen as good, bad or even a gimmick.
Perhaps the question is more about how we offer customers value for money and how we support them to make informed choices?
Financial services as an industry works on lean margins and with costs of customer acquisition so high, there must be a balance to subsidise these costs across business models. Financial services models are dependent on building value over time. In addition, the regulator tells us we must encourage customers to shop around. This leaves the industry with a challenge.
Teaser pricing must tread a fine line with price discrimination. Student discounts for cinema tickets and coffee shop loyalty cards are accepted as a norm and as legitimate commercial pricing practice. They can also improve fairness as they open access to consumers who may otherwise not afford the product. However, this must be balanced with the need to treat customers fairly and to ensure that customer communications are clear, easily understood enabling them to make an informed choice. This is not easy in a complex product market and has led the FOS to create framework to assess fair pricing.
Our society tells us to buy now and pay later. For financial services often the acquisition of the few has to be paid for by the many. There are direct costs associated by product and services are inevitably more expensive to run. Whilst there is a need to eliminate cross subsidy, there is also the question on how banks should approach these challenges for vulnerable customer and how to evaluate these considerations in fair pricing frameworks.
Nudge marketing pushes customers to the outcome we want them to have. However, sludge marketing drive action companies want but is it in the customer’s best interests? Are these forms of marketing necessarily a good thing? If there is a balance to achieve, it must be education vs honesty.
RBS have recently started leading the way with fixed home insurance premiums for 3 years as part of its campaign to end teaser rate pricing.
Teaser or adding value?
If the consideration is how to achieve value for customers, the question perhaps returns to customer service and personalised propositions.
Taking a balanced and even approach is perhaps the way forward. The energy industry has successfully used promotions to attract new customers whilst also offering service and value propositions to reward customer loyalty. For energy companies, it is widely accepted that teasers are loss making and the question is whether the business can sustain the adjustment.
There remains confusion for customers as they are faced with options, not on comparing rates, but comparing vouchers or toys instead. What is it that savvy customers value? And who defines this is it customer or industry led?
For aggregators, the ability to “churn” customers is essential and they don’t lose money with this model. For financial services it is the opposite. Aggregators don’t lose money on a banks headline rates.
Where there is a value exchange for consumers and businesses perhaps the metric is different?
The regulator has pushed open banking citing the need for proper engagement with customers. In Telco/ energy smart meters were pushed into the market (perhaps before technology and customers were ready for the value proposition).
However, to keep up with the pace of technology change we see true value being created. Smart metres require a critical mass of data to give a decent reading. New smart metres can offer a stronger value position as customer use of technology catches up with the proposition.
Sheila’s Wheels based their proposition on data and data overlay to create value and a sustainable business model. Amazon are leading the way with SME funding via their marketplace.
And who knows where open banking will take us in the future.
Is it all about communicating the strength of the product? And if so, how many companies ask customers what they would value?
We recognise the need to engage with customers and personalise and the need to approach markets in a balanced, even and sustainable way. In Australia the market does not support customer incentivisation towards products, the difference must be in value alone.
Can we learn from this? Or is the impact on our CPA and ROI too difficult to balance?
Who defines value and points of differentiation for customers?
What is value? Amazon and Monzo both work to 5-year proforma models and BGL use a 5-year pricing model. Apple create value in identity, a set of value initiatives and value points that become aspirational. O2 and BGL have worked together to create a telematics product based on data that has the potential to transform motor insurance for young drivers.
New models have to change and break and be re-formed. The value proposition will perhaps become a customer centric approach + data + investment = value. Rewarding behaviour, the value exchange becomes quite different e.g. Vitality or Apple watch. Both brand loyalty will have a part to play in success.
With all these considerations, is there another ESG one? The environmental agenda tells us that in in 40 years a high proportion of people will have houses under water due to global warming. What do we do? The help to buy scheme adds value for customers and the value proposition is strong, but if by 2080 30% of houses won’t be above water in London and East Anglia how should the industry respond? Tesco’s and Sainsburys have already come out of the mortgage market. Is it related?
We don’t know what tomorrow will bring but as technology supports evolution in financial services propositions perhaps, we will see new models that support customer loyalty. New business models will support the evolution of the value exchange and perhaps the question will become less about what customers are willing to pay but what value exchange you can create with customers that support them and help your business model evolve.
There will be winners and losers and it will be an interesting area to watch.
Expert: Kevin Mountford – Raisin UK
Facilitator: Sarah Collinson – All Clear Insurance