Are you on the best deal? Prompting customers towards fair pricing

Regulators across different sectors have been focusing on the issue of fair pricing, and in particular introductory prices (others call it a ‘loyalty penalty’) over recent months. At the heart of this debate is the extent to which price differentials for what appears to be the same product or service are fair. In the retail energy market, prices have already been capped to restrict the size of such price differentials.  But there are good reasons for such differentials. The Competition and Markets Authority recently recognised that introductory deals “can encourage people to shop around and try out new services, as well as allowing new businesses a foot in the door by attracting new customers”.

Ofcom has today announced that it will require broadband, phone and pay-TV firms to prompt customers before their contract comes to an end, and at regular intervals thereafter. These prompts and reminders will show the provider's best available deals, and the aim is to encourage customers to shop around and take advantage of these introductory prices. Firms across different sectors may already use similar prompts, but minimum standards for transparency could be one way to tackle concerns about fair pricing.

However, there is a question of whether such prompts are intended to change customer behaviour and/or pricing outcomes. There are two parts to this question:

• If information is clear and it is easy to switch products, then does it matter to policy makers how customers behave or what pricing outcomes are?
• If customer behaviour or pricing outcomes do matter, then will prompts of the type proposed by Ofcom move pricing towards these desired outcomes?

Experience in other markets suggests that such interventions need to be tested if particular outcomes are the goal. In randomised control trials in the cash savings market conducted in 2015, similar annual prompts were trialled, but found not to have the desired impact and the remedy was not taken forward.

Ofcom has used focus groups to ‘test’ the remedy in this case, asking customers what they thought about different types of prompt. Such research tends to lead to interventions that provide information (as this is what customers say they want), but is not insightful about what will change behaviour (as customers’ actual decision making is significantly influenced by many factors beyond information). Ofcom has committed to monitoring the impact of these prompts, and so such evidence could emerge in future.

Rather than being prescriptive on which letters firms should send, an alternative approach taken by the FCA is to provide more clarity on what fairness means in terms of outcomes, and to set an expectation for firms that they should assess and evidence whether customers are being treated fairly. Whilst this approach is still at an early stage, the greater clarity and precision on what the FCA expects could allow firms to assess the degree of concern about their own pricing, and then be more creative about how they design products, customer journeys and communications (including such prompts) to mitigate these specific concerns.