Illustrations: Matt Wade.
Consumers can be a compliant lot. Just look at our banking habits. Surveys have shown more than 50 per cent of Australians have been with their main bank for more than 10 years. That’s longer than the median duration of Australian marriages that end in divorce – 8.7 years from wedding day to separation, according the Australian Institute of Family Studies.
And we’re not alone. Research by Britain’s Payments Council found the average person’s “relationship” with a bank account is 17 years, which is about five-and-a-half years longer than the average marriage. The council’s survey showed many consumers make lasting decisions about banking at a very early age. More than a quarter of current bank account holders in Britain use the same financial institution as one or both of their parents. I suspect we’d have a similar proportion here in Australia.
But consumers aren't just creatures of habit, they’re also prone to suffering in silence. A 2011 survey conducted for the Australian Communications and Media Authority found that 76 per cent of those who contacted their communications provider with a grievance did nothing more about it. Only 6 per cent decided to switch providers and just 1 per cent told others about their dissatisfaction.
Millions of consumers fail to complain altogether. A survey published in February by the UK’s Ombudsman Services found 38 million complaints were made in Britain last year but about 40 million more complaints went unreported. About one third held fire with their complaint because they felt businesses didn’t care very much if something went wrong with a product or service. Another third of respondents didn’t complain because it was too much of a hassle.
So why are so many consumers so passive? One reason is what behavioural economists call “loss aversion” – the tendency for consumers to care more about preventing a loss than making a gain. The fear that a new, unknown supplier will be even worse, or at least no better, than the one they've got contributes to our reluctance to switch.
Consumers also have a tendency to overestimate the short-term costs of switching and to underestimate the longer term benefits of switching. This is linked to what researchers have found to be a strong “status quo bias” in consumer behaviour. People are surprisingly reluctant to change their circumstances even in the face of an obvious long-term benefit.
Behavioural economists have also found consumers feel the loss of parting with something they already own more strongly than the potential gain from acquiring another good of equal real value. This “endowment effect” can discourage consumers from giving something up, even when they’re not completely happy with it.
Australian consumers face another dynamic that might sap our motivation to switch – an economy marked by oligopolies. A host of important consumer markets including banking, airlines, supermarkets, petrol and telecommunications are dominated by a very small number of very big players. Why change when the few alternatives don’t seem very different?
And then there’s the “lazy tax” levied on millions of apathetic consumers unwilling to shop around. A survey of Australian car insurers by the consumer advocacy group, Choice, last year neatly illustrated how the lazy tax works. One-third of the firms questioned admitted their premiums for renewals would be higher than premiums for new customers, when all other factors were held constant.
Even though insurers are likely to provide a discount when an existing customer queries an annual premium rise, many consumers simply tolerate the hike rather than checking whether they could get a better deal.
“This is essentially the price consumers are paying for their reluctance to switch,” says Choice.
The finding of the Choice survey challenges the assumption that firms routinely reward consumer loyalty with lower prices.
In modern consumer markets it pays to be feisty.