BLIND LOYALTY OF THE MONTH
Broadband providers punish loyal customers with an, on average, 43% price rise when they reach the end of their contract. Stewart Mitchell asks why
You could be spending almost £200 extra per year by blindly sticking with your current broadband supplier. Find out if you’re with one of the worst offenders in the UK.
What price loyalty? Offering the best deals to new customers has long been a practice in many sectors – not only broadband – but the degree to which loyal customers are being exploited by their ISPs has reached record levels. Sign up for a broadband contract today and you could end up paying half as much again by the time that deal expires in two years’ time. And don’t expect your broadband provider to warn you of the hike, either.
According to Citizens Advice figures, customers who don’t change providers or negotiate a new deal once their contract has expired can expect to pay an average of almost £10 a month more for the same service. “People on the cheapest basic broadband deals are hit with an average price rise of £113 a year once their deal ends – with many unaware they face an increase in cost,” the organisation said, adding that over a third are unaware that their bill will go up.
Citizens Advice analysis of the cheapest basic broadband deals from the five largest suppliers finds that prices go up by an average of 43%, or £9.45 extra a month, at the end of the fixed contract period.
Others claim the situation is even more dire for those who stay put. Comparison site
cable.co.uk, for example, claims users who switch could save £322 a year, on average, while a glance at the postcode checker on broadband.co.uk/checker highlights how prices leap once the obligatory lock-in period has ended.
Informed, serial switchers can make savings once their contract handcuffs are unlocked, but many people hardly ever switch or think to check their fees as long as the service is working. “The increasing depth of promotional discounting can result in unengaged consumers paying more than those who are engaged with the market and look around for the best deals,” explained telecoms regulator Ofcom, which told
PC Pro it was “acutely aware” that hidden price increases were a major issue.
“The sophisticated use of price discounting may compound issues around price complexity,” Ofcom admitted.
Over the past six years, ISPs have increasingly looked to attract customers with introductory offers, and now the monthly reductions effectively run for the whole period of the contract – which looks less of an introduction and more like a bait-and-switch offering.
Between Q1 2011 and Q3 2016, the average value of promotional discounts rose from 10% to 23%. At the same time, the extra amount people were charged once their initial contract period expired increased significantly. In 2011, Citizens Advice research found consumers were paying on average between £1.58 and £1.84 more a month out of contract, whereas now the average price hike is £9.45 per month.
Given that Ofcom believes 42% of fixed line and broadband customers are out of contract and the average tenure is six
ISPs seek higher margins from subscribers who are too hooked, too lazy or too busy to bother switching
years, many subscribers are paying these higher tariffs – referred to in the industry as “standard variable tariffs”.
Why ISPs employ these tactics
Given that attracting customers is costly, it seems almost perverse to put prices up when a customer is free to leave. Why take such a gamble? Put simply, the loyal customers who don’t notice the price rises bump up the average revenue per user (ARPU) figures, which are key to any service provider’s bottom line.
ISPs assume that dedicated switchers will always move away, and so seek higher margins from subscribers who are too hooked, too lazy or too busy to bother switching. “They are banking on people just forgetting about it,” said Edd Dawson, CEO at price comparison site broadband.co.uk. “They don’t usually write a letter at the end of your contract saying: ‘you’re out of contract and are going onto a rolling contract and the prices are going to go up’.”
It’s a surprisingly easy tactic to employ, and falls within the current rules for ISP conduct laid out by Ofcom because the price rise was communicated during the sign-up process, however obliquely. “They put this in the contract upfront, saying it’s £20 a month now, but after 12 months it will rise to £26, so they notify you at the start and hope you’ll forget or don’t want to go through the switching process,” said Dawson.
“You can always find a cheaper deal – and the providers think ‘Well, those people are going to go anyway – we’ll accept that but we’ll hope that a good percentage of people will just stay’. Or, more likely, they just forget – 18 months after signing up, who remembers what they agreed to?”
ISPs have a history of sailing close to the wind with pricing and contract strategies – Ofcom has stepped in (often belatedly, after it was apparent consumers were suffering) to improve consumer protection. For example, the regulator stopped companies from hiking prices during a contract and then trying to charge customers an exit penalty if they objected, and it also stepped in when it became common practice to automatically renew fixed-term contracts.
Because ISPs are now obliged to inform customers and offer them the chance to leave if they increase prices during the contract, they appear to favour putting prices up at the end. “If you are in contract and they put the price up, they have to write you a letter and give you the opportunity to leave your contract early, as BT and Sky have done recently,” said Dawson.
Rather than risk that, companies are more likely to wait and hike prices at the end of the contract, especially because in many cases they are still making decent ARPU even during the discount period. “The value comes earlier than the end of the contract and there’s a great deal of upsell,” said Dawson. “There’s selling higher speeds, TV services, and if it’s an Openreach product, you need a phone service. They are good at getting value out of customers much earlier than in year three or four – even on a half-price deal they’ll be making a profit on having that customer within the first year.”
Why do people put up with it?
Despite the fact that switching broadband is now generally hasslefree – marginally less so if switching between different technologies – many people are still put off by previous experiences, when switching could mean days or even weeks without broadband. Bundled services give people a reason to stick with a supplier they might resent, because the triple- and quad-play packages become central to the home and create a faux loyalty. “Broadband is a bit more sticky than energy providers,” said Dan Howdle, telecoms analyst at cable.co.uk. “If you want to switch energy providers, you can go online and in about five minutes you can – it’s one form, it’s invisible.
“The difference with broadband is that there are things attached. There’s more likelihood of people being loyal, not through any love of the company, but because they’ve got all their Sky TV channels coming through the service and they have a box with 500 hours of their favourite programmes. If they switch provider, all of that comes down.”
Those hooks are often enough to convince people to turn a blind eye to the £2 price rise here, and the £3 a month extra there. “The companies are well aware of this. Once people are in the door you hook them on BT TV, for example, and because it shows Champions League football it creates an artificial loyalty because it’s to the equipment and not the company as a whole.”
Here’s the legal bit
One of the major criticisms aimed at ISPs for the out-ofcontract price rises imposed on loyal customers is that they are not made clear enough during sign-up.
Citizens Advice has criticised many of the big suppliers for failing to inform customers of impending hikes. While BT mentions the out-of-contract price on its main sign-up page, alongside the initial discount prices, albeit in a smaller font, others are more obtuse. Sky lists the out-of-contract tariff under the section titled “Here’s the legal bit” (one click away from the in-contract tariff) and in its terms and conditions that are two clicks away. With TalkTalk, the information about the price hike from £19.99 a month to £27 is buried four clicks away on the “Buy it now” page.
Citizens Advice believes this lack of transparency is something that the Advertising Standards Authority (ASA) and Ofcom should review. “The ASA should examine whether broadband providers are displaying pricing clearly on websites and through advertising, including the costs once the minimum contract period has ended,” the watchdog said. “The ASA should require providers to clearly state the price of broadband after the minimum contract period alongside the initial tariff.
Citizens Advice also wants regulator Ofcom to make it a requirement of all ISPs to “use timely, smart alerts (such as text messages) to inform customers that they are nearing the end of their minimum contract period and that their tariff is about to rise”.
Falling costs, rising prices
What makes the record price increases even more galling is that the wholesale costs of supplying broadband have fallen markedly. According to Ofcom, wholesale phone and broadband costs – those charged by Openreach to retail ISPs – have fallen 25% over the past six years. In comparison, charges imposed on customers have gone the other way, rising by 28% and 40% respectively.
The major providers all claim to have added various extra features at no cost, but the overheads are inevitably factored into the overall price paid for consumers. “With BT and Sky, all the ‘free’ extras have to be paid for somewhere along the line,” said Andrew Ferguson, analyst at thinkbroadband.com. “All the things like free routers, cloud storage, Wi-Fi hotspots [and] parental controls all carry a small incremental cost, plus things like BT consumer call centres moving back to UK and thus higher salaries.”
One factor more than any other also appears to have pushed prices up, especially among those ISPs offering TV deals: the price of negotiating for sports coverage rights.
“Before BT came into the market, Sky was the sole realistic bidder for Premier League football,” said Howdle fr0m cable.co.uk. “If you introduce a new bidder [such as BT], then the price goes through the ceiling because they are competing against each other – so the prices have been going up with great frequency and that’s based not necessarily on its need to fulfil obligations to customers or shareholders, but because the services they are providing are costing them more.”
Your increased broadband fees are helping to make footballers even richer. What a reassuring thought…