Online price-comparison sites help consumers save money by finding the best deals, including on monthly mobile phone tariffs. A new academic study finds, however, that consumers seem more willing to pay higher upfront fees in order to get peace of mind that they won’t be hit by add-on charges for exceeding their call or data limits.
The study, published in the September 2023 issue of the Journal of Economic Behavior and Organization, calls into question the conventional wisdom, including among many regulators, that information is the key driver in consumer choice. The research is based on 60,000 mobile phone users in the UK who received personalised information on their mobile phone usage and fees from the popular UK comparison site Billmonitor.com.
(Billmonitor.com’s website says: “Last year the mobile phone networks overcharged UK businesses and consumers approximately £7.6 trillion. We’re here to keep them honest.”)
Over and under: study looks at 2 types of mobile consumer
Put simply, the study looks at 2 types of mobile phone consumers: those paying above their monthly fee because they exceeded their allowance (known as ‘overage’) who could save money by switching to a higher (more inclusive) plan, and those who could save money by switching to a lower (less inclusive) plan because their usage is lower than their allowance.
Overage affected 64% of customers in the study sample, with an average monthly overage of £14 and a median of £7, which are large figures compared to an average monthly bill in the sample of £25.
Avoiding bill shocks is a big driver for customers, not only in the mobile industry
“The results show that, controlling for savings, switching to a different plan is more likely if the customer was charged overage fees,” says study co-author Christos Genakos, Professor of Economics at Cambridge Judge Business School. “This shows that savings are not necessarily the only thing that even well-informed consumers are looking for, but rather, they like a fixed reference point that leaves little room for bill shocks.”
The study entitled “Is having an expert ‘friend’ enough? An analysis of consumer switching behaviour in mobile telephony” is co-authored by Christos Genakos of Cambridge Judge Business School, Costas Roumanias of Athens University of Economics and Business, and Tommaso Valletti of Imperial College London.
The study has potential broader implications beyond mobile telephony to other businesses, as the authors say the findings on consumer inertia and mental accounting could also be applicable to many economic settings in which consumers choose ‘3-part’ tariff contracts that specify fixed fees, allowances, and payments for exceeding the allowances (eg car leases, credit cards, subscription services).
Experiencing a loss is more powerful than saving money upfront
Key to the study is a finding that paying more than the base monthly charge is experienced as a loss by consumers. “Paying more than the monthly rental fee is a more painful experience for consumers, so they react more strongly to paying more than the base monthly fee than they do in saving the same amount of money by taking a cheaper monthly tariff,” says Christos Genakos.
For regulators such as Ofcom (the Office of Communications) in the UK and other policymakers, the findings are eye-opening: if the only issue were information acquisition, then both types of consumers should switch with the same probability upon receiving their personalised information.
Regulators should look beyond price comparison in advising consumers
The authors say that just informing consumers about potential savings may not prompt the healthy competitive switching that regulators would like to achieve, so regulators hoping to rely on price-comparison engines to discipline market prices should first investigate what giving ‘good advice’ means in a context that includes loss aversion.
The study also looks at inertia: 62% of customers who received information that they can save money by switching to an alternative plan do not act on this advice, forgoing £186 savings per year per capita on average based on the study sample.
The study is based on data on Billmonitor.com’s customers during a 2010-2012 sample period, examining switching within mobile operator in order for switching tariff plans to be seamless and not constrained by contractual clauses.
Customers prefer stable pricing structures that avoid the unexpected
Having an ’expert friend’ (in the form of such a comparison site) calculate how much you can save increases the probability that a consumer switches plans, the authors say, but “the psychological pain of paying over and above what you expected to pay as a fixed monthly fee is an even greater motivator to switch, in addition to the conventional economic reasoning that only savings information should matter”.
Genakos, C., Roumanias, C., and Vlletti, T.M. (2023) “Is having an expert ‘friend’ enough? An analysis of consumer switching behavior in mobile telephony” Journal of Economic Behavior and Organization