Many people assume that if they stay with the same energy company they might get a deal for loyal customers and pay less for their energy supply. After all, that’s often the case with restaurants or shops – loyal customers get rewards and discounts. Unfortunately, that’s not the case with essential services such as energy, and loyal customers often end up paying more.
Do you want to know why?
Often if your energy expires and you haven’t changed a supplier or chosen a new deal with your existing one, your energy provider puts you on a more expensive tariff. Therefore, switching providers and comparing available tariffs is always better than simply staying with your current one.
Energy suppliers know that customers often forget about the fact that their contract is about to finish, and hence they use that to make money.
What is the loyalty penalty?
Let’s look at the problem in more detail.
The loyalty penalty is the term used to describe the cost of being a long-standing customer, compared to new customers who sign up for the same services.
When does it occur?
In the energy market, as has already been mentioned, the loyalty penalty happens when loyal customers are rolled over on more expensive tariffs once their energy contracts come to an end. Consequently, they pay more for energy than those who just switched to the same supplier.
Does the loyalty penalty only exist in the energy market?
Not at all! The loyalty penalty can be observed in many markets and the price customers pay as a result of it can vary. Have a look at the table below to see how much you can end up paying if the loyalty penalty is imposed on you in some of the popular essential-services markets:
|Market||Average annual cost of the loyalty penalty|
|Fixed rate mortgage||£439|
Based on data published by Citizens Advice
Do many people pay the loyalty penalty?
If you realise that you’ve been paying more for your essential services as a result of the loyalty penalty, don’t worry – you’re not the only one.
- Almost 13 million households automatically renew their home insurance each year.
- Over 1 million mortgage holders could save money if they switched.
- Around 12 million households are currently paying rates of standard variable energy tariffs.
Is anyone more likely to be paying the loyalty penalty?
Although the loyalty penalty can affect anyone, studies show that certain groups are more at risk of having to deal with it than others.
|Elderly aged 65 and over||More likely to keep the same energy contract for several years. More likely to be overwhelmed by numerous energy suppliers and tariffs, hence staying with their current one. Lower cognitive functions. Likely to find the switching process difficult.|
|People on low incomes||Less active in essential services markets. Lower levels of confidence.|
|People who did not go to university||Lower understanding of the switching process and available products. Less active in essential services markets.|
Why do people face the loyalty penalty?
There are several customer behaviours that make people face the loyalty penalty. The main factors that often determine it are:
- Not knowing what the best deal is
Many people who are currently satisfied with their energy tariff and rates they’re paying, simply assume that it’s a good deal and they do not make the effort to look at other contracts available. In turn, they decide to just stick to what they know and end up paying more than they would if they switched to a new provider.
Moreover, people often feel overwhelmed by a large number of tariffs and energy deals available. They delay choosing one until it’s too late and they’ve been rolled over to a more expensive rate that they’re stuck with for a year or longer.
- Not realising that there is a penalty
Getting rewards for being a loyal customer in some sectors is a common practice, so many people assume that that’s also the case with the energy market. Customers often do not realise that they could be penalised for being loyal to their supplier.
Moreover, many people just assume that if they do not choose a new energy deal, they will simply keep paying as much as they currently are. They are simply not aware of what rollover contracts are.
- Wanting to avoid complex pricing structures
Comparing hundreds of different energy deals can be overwhelming as each of them offers different rates. Often, understanding pricing structures and what charges are included in the contract can be tricky. Hence, in order to avoid that, many people decide to stick with what they know already. If they are happy with their existing rates, they decide to just stick to that instead of analysing how much they would pay if they switched suppliers.
- Not getting all the information
Most energy companies hide the information about the loyalty penalty. Even though they inform the customers that their contract is about to expire, and they tell them what their rates will be after that, suppliers know that customers are likely to ignore that information and they do not make an effort to make all that clear.
Moreover, energy providers often do not tell the customers that their standard variable tariff is the most expensive one. As the tariffs have ‘standard’ in the name, many customers assume that that’s what most people go for and that they offer regular rates.
How to avoid paying the loyalty penalty?
The best solution to avoiding the loyalty penalty is to often compare available energy deals and regularly switch suppliers. The energy prices change all the time so even if you’re satisfied with your current contract when it expires you might be able to get a better deal. Many people think that switching energy supplier requires a lot of effort, and hence they just stick with their current supplier for several years.
That could not be more wrong!