Price has been everything in recent years as companies have vied for customers looking to switch, but new research reveals that all this rampant competition is having a dramatic effect on the market, writes CONOR POPE
HAVE YOU BEEN a loyal customer of the ESB for many years? If the answer is yes, then you will hopefully be ever so slightly mortified to learn that this completely misguided loyalty has cost you at least €500 over the past three years.
If wasting €500 does not alarm you (and it really, really should), then perhaps this figure might: all told, “loyal” ESB customers who failed to switch to a cheaper energy provider when Bord Gáis Energy, Airtricity and Flo Gas entered the residential market and started competing aggressively on price in 2009 have wasted about €700 million over the past three years. Yes, €700m.
Switching, then, saves money. And it can save a whole lot of money. Take health insurance. A person who is canny can save themselves hundreds if not thousands of euro and guarantee themselves exactly the same level of cover by moving from one provider to another. Yet, according to the Health Insurance Authority, only 23 per cent of people with policies have ever moved.
That is not to say people have not moved. Many hundreds of thousands have found better-value energy and cheaper health insurance, but according to a soon-to-be- published study from Amárach Research, Irish consumers are developing switching fatigue. The survey also highlights the role serial switchers are playing in driving down prices, but the report, written by Amárach’s managing director Mark Nolan, says that the constant search for the lowest price could ultimately harm businesses and consumers.
The survey of just under 1,000 respondents shows that there has been a decline in the rate of switching when it comes to car insurance, landline providers, broadband providers, gas, electricity and mobile phone. The biggest rate of decline is seen when it comes to internet providers, with the rate of switching falling off by 38 per cent in the past year. The rate of mobile phone switching, meanwhile, has fallen by 34 per cent over the same period while the numbers switching electricity provider have fallen by 29 per cent.
The only areas where there is switching growth is health insurance – switching increased by 13 per cent last year – and banking current accounts, which increased by 78 per cent, although from a low base.
In his analysis of the research, Nolan says that consumers have experienced “downward pressure on income and spending capacity” in recent years (that’s becoming skint, to you and me), and as a result, have become less open to being “up-sold”, or sold things at a higher price with a perceived higher value.
He says that encouraging existing customers to spend more was commonplace in the boom (or bubble) years and people were open to and even actively seeking extra value and ways to spend money. “They were happy to pay a premium for innovations that made buying, consuming and disposing of products and services easier and more enjoyable,” he says.
The strategy of getting people to spend more by constantly developing the next big thing was “predicated on the foundation reality that consumers had more to spend, and would do so if businesses and brands could unlock this pent-up spend potential by offering more”.
Of course, as it turns out, the strategy was illusory and unsustainable, and when consumers suddenly stopped wanting to spend more “the need to hone acquisition and retention capabilities became a priority, as businesses grappled to maintain competitiveness in a vastly changing landscape,” Nolan says.
A range of tactics were employed to attract competitor customers and these practices were mirrored across multiple categories simultaneously. “The aggressive nature with which many industries focused attention on switching resulted in consumers becoming switching experts themselves. They have been conditioned to understand and expect promiscuity across brands, and have arguably become better at playing the switching game than many of the same businesses who are propagating the switching agenda.”
Nolan says this switching mindset has led many businesses he works for to explore better and more sustainable ways to win the switching battle. “The nature of the challenge now hinges on ensuring that categories as a whole don’t drive their industries to a commodity situation. Commoditisation leads to an increasing growth in cost to acquire customers and simultaneously erodes the value of each customer acquired. The doomsday scenario, if commoditisation is pursued blindly, is that the cost of acquisition of new customers exceeds the value of the customer.”
While Nolan accepts that this may sound dramatic, he insists it is not overstating the case. “It is the very point that many of Ireland’s high-profile consumer categories are now approaching rapidly, and arguably are quickly surpassing, he suggests. “The extent to which switching has become the norm across many categories is evident. In many of these categories, half the customer base and more have engaged in switching.”
He says there are consequences to this new switching mantra, and as switching continues “the net gain to brands diminishes as the cost to acquire increases and consumers become ever more expectant and demanding in terms of what will get them to switch”.
According to Nolan, there are three customer types: switching agnostics, who have never switched, and are unlikely to ever do so; fatigued switchers, who have switched initially but have become less interested in switching offers as the level of differentiation and saving potential has become less pronounced; and serial switchers, who switch repeatedly for incremental value and have close to zero loyalty to providers or brands.
Nolan says that in the current market, switching offers need to be better to attract customers, but this increases the likelihood that the new customers will be the serial switchers, who demand more and show no loyalty – so the “value that businesses can offer becomes less compelling”.
He has recorded a “stark and clear” decline in switching in most categories and says it represents the trend of ever reducing availability of switchers. “This is an indication that the evolution of the switching battle in these categories is approaching the space where serial switchers are all that are left.”
He says the exceptions to the trend of declining switching levels is limited to health insurance and main current-account provider. In both of these categories, the rate of switching is likely to grow.
Nolan believes that the practice of price- based switching “has been maxed out and is likely to erode value rather than increase it from this point onwards if continued”. He says there is a need to move away from the “shallow price-based switching offers and resurrect real value”.
But what is real value? Answering this question is at the heart of moving to a sustainable switching landscape. “Value in recent years has become synonymous with low price solely, and low price regardless of the quality offered.” Nolan believes that value is, and should be, fundamentally a fair price for fair quality, and providing as much quality for as low a price as possible is how value should be constructed and communicated.”
He says years of battling on the singular dimension of price, in an effort to encourage switching, has diluted consumers understanding of differences between providers and emotional connection with brands. “This commoditisation of categories is the underlying illness which needs to be treated in 2012 and beyond, with ever decreasing spirals of price discounting the symptoms that must be remedied as a matter of urgency. Failure to do so will erode sustainability and margins, and only companies with the deepest pockets will survive.”
He says the challenge has been met head on in the telecoms sector where providers have engaged in high visibility customer engagement programmes, launched value added initiatives and engaged in sponsorship campaigns. “This overt shift from price only based propositions to more ephemeral engagement has also begun in the energy sector. This shift in focus is where categories must move towards sustainability and profitability to endure.”
He says the battle needs to be shifted “to a more sophisticated space” and suggests that the winning brands “will lead this evolution rather than follow it. Those who follow will rely on inertia to protect market share and pursue low value.”
Inertia ... it’s not a great thing to rely on and it’s not a great way to be.
