Find out everything you need to know about the “loyalty penalty” or “loyalty tax”, including how it might be affecting you.
What is the loyalty penalty?
The loyalty penalty refers to a practice where existing customers are charged more for the same product or service than new customers. This can often be the case where a company offers a cheap introductory deal and then “auto-renews” onto a higher price.
Why does the loyalty penalty exist?
Many companies now offer contracts that automatically renew. This means that the customer needs to be paying attention to avoid a price hike. If you don’t shop around for better deals regularly then companies can overcharge you and you may never notice.
Price rises can be introduced in many different ways such as:
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- Price walking – where prices increase a little bit every year, so there’s no alarming jump but eventually you end up paying far too much.
- Price jumps – when you sign up for an initial introductory offer and then are charged significantly more when this deal ends
Which bills can be affected by the loyalty penalty?
Many industries involve some form of loyalty penalty - from magazine subscriptions to car insurance.
Some of the industries most commonly associated with a loyalty penalty are:
- Energy bills
- Mobile phone contracts
- Broadband deals
- Insurance costs
- Mortgage rates
For example, with mobile phone contracts you normally sign up for deals where the cost of the handset is included in the monthly payments. However, if you use the same phone for several years, the provider will never reduce your monthly price, even after the handset has been paid off.
What does the loyalty penalty mean for my energy bills?
In the energy industry suppliers normally sign users up on fixed 12-month tariffs. These offer the cheapest prices per unit to draw new customers in. However, when the fixed contract comes to an end the supplier can automatically roll you on to their standard variable tariff, which might cost as much as £300 more per year for the same usage.
Additionally, some suppliers will offer you a “renewal deal” at the end of your initial 12-month contract. These deals are often more expensive than the ones they have available to new customers. That's why you should never accept a renewal offer without checking if you can get a better deal elsewhere first.
In short, if you don’t run a new energy comparison every 12 months to find yourself a better deal you can end up overpaying.
What is the scale of the loyalty penalty?
Combined the loyalty penalty costs UK consumers billions of pounds a year.
In energy alone, over 50% of UK households could save 100s of pounds a year by switching to a new supplier.
How can the loyalty penalty impact me?
Nearly everyone will be impacted by the loyalty penalty at some point. If you’ve ever been offered a cheaper deal when trying to cancel a subscription, then you've probably been overpaying.
According to Citizens Advice, 8/10 bill payers have been overcharged by staying with the same provider in at least one essential market.
How can I avoid the loyalty penalty?
It’s important to be aware of the loyalty tax so that you can avoid it.
When signing up for a new deal check the renewal terms. If your deal has an end date set a reminder to see if you can get a better deal elsewhere.
For the big bills it’s worth running a price comparison every few months to see if you could save by switching. Even better sign up for an auto switching service like Switchcraft and we’ll do it for you.
What is being done to address the loyalty penalty?
In 2018 Citizens Advice submitted a super-complaint to the Competition and Markets Authority. The complaint asked for regulators to review behaviour leading to the loyalty penalty and intervene in cases where it might be harmful to consumers.
Since then several actions have been taken to try and tackle the loyalty penalty. For example, Ofcom have introduced new rules that mobile and broadband providers must notify customers who are approaching the end of their contracts. You can find an update from the CMA on progress made in tackling the loyalty penalty here.
Despite some regulation changes the loyalty penalty is still impacting millions of people and costing UK consumers billions of pounds.
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