Date posted: 30/08/2021 5 min read

The price is right – or is it?

Prices are rising, but chasing a quick buck at the expense of customer relationships is not a good basis for business success.

In Brief

  • A poor value offering has its root in an ‘us versus them’ view of customers: we win when they lose.
  • Being pro customer actually makes business sense.
  • High prices, however, can be useful signals to ration use of scarce resources or to develop cheaper options.

Prices are on the move. After years of inflation running at low levels – lower than either Australia’s or New Zealand’s Reserve Banks would have liked – price pressures are building up.

Other than in the US, they haven’t yet shown up a lot in the official data: Australia’s latest inflation rate is 1.1%, New Zealand’s 1.5%. But the traffic is one-way.

National Australia Bank’s April 2021 business survey stated that in Australia, “Our measures of labour and input costs have definitely trended higher in recent months”, while ANZ’s Business Outlook Survey in New Zealand from early May reported that, “Pricing expectations hit yet another record high, and cost expectations are off the charts.”

Nobody’s sure whether it is all down to COVID-related disruptions; a post-lockdown surge in demand colliding with supply-chain blockages is a combo guaranteed to get prices bubbling. Or it may be that years of ultra-easy monetary policy are belatedly having their intended effect of getting inflation back towards 2% and keeping it there.

But, at a minimum, businesses are going to have to update their prices in coming months and may also have to start thinking harder about pricing strategies in the longer term. It may be a good opportunity to check that some older pricing practices aren’t lurking in your business processes, ready to leap out and cause some serious reputational grief.

The real cost of rotten value for money

The potential pricing problem is not too-high prices, per se. Economists and competition regulators don’t have an issue with high prices, provided they’re not expressions of monopoly power or cartel collusion. It’s quite the reverse.

High prices can be useful signals to both consumers and producers to ration use of scarce resources or to develop cheaper substitutes. They can also be evidence that consumers are prepared to open their wallets for a good product they value highly – raise your glass of premium Coonawarra Cab Sav or central Otago Pinot Noir if you agree.

Nor is the problem price discrimination. In economist speak, that’s charging different prices to people with a different willingness to pay. I may not like it, but I can live with the most expensive economy one-way flight tomorrow from Sydney to Canberra, or from Auckland to Wellington, costing roughly five times the cheapest.

And it can even work out in a good way: the profit from selling high-priced software to a big company funds the student version, for example, so everyone ends up able to buy.

The real price risk is those offers that trade on customer inertia, ignorance or impotence and are terrible value. The example I like to use is the UK customer who, while on holiday in South Africa in 2014, helped a party get going by downloading a music album to her phone. It cost her UK£2600 when she got back.

Back then, global roaming arrangements between telcos were a rort. It was an agreement for telco A to rip off telco B’s customers, provided telco B was allowed to rip off telco A’s.

They’ve been stomped on since. The European Union, for example, essentially banned them in 2017 by legislating for ‘roam like at home’ – you pay the same wherever you are. Trans-Tasman roaming rates also used to be inordinately expensive, but were cowed to reasonable levels by both countries’ governments threatening to legislate if they weren’t curbed.

The price shock of your bad power plan

Other poor value price plans are being clobbered, too. In both Australia and New Zealand, for example, there have been (and may still be) large numbers of customers on poor value electricity plans.

In New Zealand, the standard tactic for an incumbent energy provider was to do nothing until a customer threatened to leave. The power company would spring into action only when the request to switch the account reached its engineers. At that point – but no earlier – the incumbent would flourish a ‘win back’ offer to entice the customer to return.

Since last year, incumbents are forbidden to offer a ‘win back’ to departing customers for six months (180 days). It increases the penalty to the company for not offering good value in the first place.

In Australia, there are now regulated default ‘standard offerings’ for power companies, which means that even if you dumbly go with what’s first shown to you, it won’t be as bad a power deal as it used to be.

Yet despite regulators’ vigorous efforts to catch and corral them, you wonder how many of these poor pricing plans are still out there, how hard they’re being hawked, and how aware senior management are of legacy problems.

Just this year telco Telstra got pinged by the Australian Competition & Consumer Commission, which was able to show that “sales staff at five licensed Telstra-branded stores signed up 108 Indigenous consumers to multiple post-paid mobile contracts which they did not understand and could not afford.”

You have to credit Telstra with an admirable remediation program after the event, including waiving the customers’ debts, but it’s cost them a A$50 million fine.

Why ‘pro customer’ is enlightened self-interest

Ultimately, any poor value offering has its root in an ‘us versus them’ view of customers: we win when they lose. But chasing the quick buck at the expense of solid customer relationships is the opposite of a good basis for business success, which is being a trusted provider of valued products.

“Any poor value offering has its root in an ‘us versus them’ view of customers: we win when they lose.”
Donal Curtin

Such bad behaviour is, as the quote goes, “worse than a crime; it’s a mistake”. That’s because people remember getting stiffed, sometimes passionately. We leave, for good, and we tell our friends. My former electricity provider may eventually try a ‘win back’ – good luck with that.

Conversely, a bit of pro-customer proactivity goes a long way.

Years back, my mobile phone provider looked at my usage and spontaneously suggested a better, cheaper calling plan. Two decades on, while our relationship is not especially warm and intimate, I’m still with them. That’s a pretty good return on investment on a bit of enlightened self-interest.

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