Application Exercise 5e: Loyalty tax
Question 1
Loyalty taxes are common in the energy, mobile, broadband, mortgage, credit card and insurance industries. It is where businesses charge their loyal, long-standing customers more than their new customers or those customers that they are trying to lure away from rival businesses.
Question 2
Customers can shop around and must be willing to change providers if the company they are with is not prepared to match or better the deals offered by their competitors. The use of comparison websites such as iSelect and Compare the Market can be helpful in this regard. Shopping around can lead to hundreds or even thousands of dollars of savings each year.
Question 3
The loyalty tax takes advantage of the behavioural insight known as the status quo bias. Companies know all too well that their customers often cannot be bothered shopping around because it can be seen as a time-consuming chore or just too confusing. This has led to the loyalty tax sometimes being referred to as the ‘lazy tax.’
Question 4
By law insurance providers must state the previous year’s premium on all renewal notices to help policyholders clearly see the extent of any increase to their premium, which can help them avoid paying a loyalty tax.