Energy switching: Why the customer inertia?

 
Woman looking at bills

Customers are constantly being urged to switch utility providers. But what are the psychological barriers that stop them?

We're more likely to get divorced than move bank accounts. Four-fifths of people cannot be bothered to look for cheaper gas or electric bills despite the urging of numerous consumer gurus to switch.

In short we'd rather pay hundreds of pounds a year extra on phone, broadband and utility bills rather than have to enter the mind-numbing world of the price comparison websites.

The inertia of the British public has been highlighted after Energy Secretary Chris Huhne chastised people for not seeking out the cheapest gas and electricity deals. "They do not bother," he said in an interview with the Times.

"They spend less time shopping around for a bill that's on average more than £1,000 a year than they would shop around for a £25 toaster." He denies accusing the public of "laziness" but many consumer experts say that the public are apathetic about getting a bad deal.

Start Quote

Perhaps the last thing people want to do at nine o'clock at night is save money on their utility bill”

End Quote Prof James Devlin

Energy regulator Ofgem found in a survey this year that four out of five consumers are failing to shop around for gas and electricity, costing themselves an extra £100 a year.

So why are people so reluctant to save money on bills when they delight in bargains at the supermarket or online?

For some it's a lot of hassle thinking about what, for most people, is a fairly dull subject.

There is also the possibility that the public is suspicious of firms who try to lure them away from their current provider. In July, a committee of MPs said that energy firms were using "Del Boy" tactics to get consumers to switch provider.

Consumer experts also say that many consumers wrongly fear that by moving, their service may be interrupted. In most cases - broadband apart - this worry is false.

Bills Bills. Many of us choose not to think about them

Energy is the most glaring case because the product - gas in the pipes and electricity in the wires - is identical whichever provider you opt for. The only difference is the cost and the call centre you have to deal with.

Tom Lyon, energy expert at price comparison site uSwitch.com, says it takes no more than 15 minutes to change energy provider. "It's not a particularly sexy or fun thing to do. But if you've never switched before you could save £300 to £400 a year."

Misleading doorstep selling when the energy market was first liberalised may be partly to blame for people not trusting the firms involved, he says.

Then there's the question of price. How do you know that as soon as you move the new firm won't raise prices?

There's another reason why people don't switch, says Moneysavingexpert.com founder Martin Lewis. People want instant gratification but the savings from switching may take time to register. For that reason people should stop talking about monthly bills and focus on the annual amount, he says.

By Tim Harford of BBC Radio 4's More Or Less, and author of Adapt: Why Success Always Starts With Failure'

On the side of the personal finance gurus is the "endowment effect" and "choice aversion" - both of which are psychological tendencies that might make us irrationally unwilling to switch.

The endowment affect is a tendency to prefer the devil we know.

Choice aversion was measured by the psychologists Sheena Iyengar and Mark Lepper in the famous "jam experiment" - people were offered a free sample of jam in a supermarket.

When the jam display contained six types of jam, about 30% of people went on to buy some. But when the jam display contained 24 types of jam, only about 3% went on to buy some.

There's some fascinating research by Chris Wilson and Catherine Waddams Price which studied people switching electricity suppliers, focusing specifically on those who were looking for a cheaper deal, and finding that they did a pretty lousy job.

Most people picked up less than half the available gains and a quarter of people managed to make themselves worse off by switching.

So maybe we're right to be suspicious of confusing pricing schemes and better off saving ourselves the hassle and sticking with what we have.

Some might argue that the consumer websites have an interest in people moving around. Which? and uSwitch receive a fee from some providers when customers switch, although Which says any commission is ploughed back into its charitable arm. Moneysavingexpert links only to price comparison sites, from which it receives a fee when people click through.

There may be deeper reasons why more people aren't switching. Behavioural economists have noted that people can be turned off by having too much choice. And that we form attachments to what we've got even if it's not the best deal on the table.

Prof James Devlin, deputy dean of Nottingham University Business School, says that there are different types of consumer. "Some are happy to chase every deal and get a kick out of finding them. Others don't want to read all the smallprint."

Many of us are inclined to stick to doing something unless there's a good reason to change. To behavioural economists it's called "status quo bias". For some this smacks of laziness but there may also be "quasi-rational" processes at work, Prof Devlin says.

An attractive promotional offer for a savings account or ISA may see interest rates fall after a few months. In any case, the difference between 2.5% and 3% may only deliver a small extra return.

So the value someone attaches to the time it takes might, in their judgement, not be worth it, even if to an outsider they're paying £50 too much on their gas, Prof Devlin says.

Prof Mariana Mazzucato, an evolutionary economist at the Open University, says the consumer experts misread human nature.

She believes they've fallen for the myth that people act rationally at all times and have the benefit of "perfect information". In reality we are happy to stick to what we've got as long as it's OK, she says. "Our behaviour is more about routines and rules of thumb. And inertia sets in due to both the costs of acquiring new information and the costs of switching."

While energy is fairly transparent, there's a good reason why people don't switch mobile phone provider more regularly, says Lewis. "It's probably more complicated than anything else. The interrelationship of data, minutes and texting, when and where you are making the call, means it's immensely complicated to work out the best deals."

Man looking at bills Switching: is the effort justified?

Neither do people have the same usage every month. And some people are so keen to get the latest technology like the iPhone that they are willing to lock in on high-tariff long-term contracts that are "terrible value". Switching is often, but not always, the best approach.

For those who feel safe with the brand they're with, it may be scary to jump into the arms of an unknown firm. In such cases, they should haggle rather than switch, says Lewis.

Banking is the most entrenched of our consumer habits. A Which? survey found that 62% of members have been with their bank for over 20 years.

It's a complete anomaly, says James Daley, Which? money editor. A lot of people tell researchers that they're unhappy with their bank. But when asked if they're going to switch they change their tune and insist they would rather stay where they are, he says.

Whereas people are getting better at switching their utility provider they see their mortgage and salary as too important to jeopardise, he says. Banks now offer up to £200 for customers to transfer their accounts so frustrated are they by the stasis.

"Even that is not encouraging people to switch," Daley says. The only way to reassure customers would be to give them a portable account number, in the same way that mobile phone customers can keep the same number, he argues.

But there's a clear divide in how you see the world of personal finance. For the behavioural economists, people will always value relationships and free time over theoretical savings.

"Many people do make a rational choice how to use their very limited free time," says Prof Devlin. "Perhaps the last thing they want to do at nine o'clock at night once the kids are in bed is to try and save a small amount off their utility bill."

But uSwitch's Lyon disagrees. "Unless I was talking to Wayne Rooney I'd say he's wrong. It takes so little time and the potential rewards are substantial."

 

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  • rate this
    0

    Comment number 368.

    Like Netsville, I have switched banks and utilities a few times, to find poor service and downright lies by companies saying they will save you money. ATM I am looking to switch again, everything, utilities, bank, car and house insurance as companies stick up their rates if you appear loyal to them. Last year car insurance was to be 100£ more, another company said less and old company matched

  • rate this
    0

    Comment number 367.

    To be fair I have never contemplated switching Banks. Why would I? They all offer the same service that I need so what would be the point? All I want from a Bank is a safe place to keep my money and have unlimited access to it whenever I want, and a debit card too for ease of transaction. What more could they provide for me that I couldn't find cheaper else where?

  • rate this
    +1

    Comment number 366.

    As someone who has been with the same bank for over thirty years, and has only changed energy supplier once- how about the idea that one has more important or interesting things to do than hover over price comparison sites, to find that the now best deal is with the company you left three moves ago?
    As my kids would say, I can't be a****d!

  • rate this
    +2

    Comment number 365.

    I think one of the reasons for it not touched on in the article is the appalling service so many companies have when you switch. The call may only take minutes but cleaning up the mess afterwards can take months. I don't know a single person who has switched bank and not had direct debit transfer nightmares. Same with the energy comanies where when the market 1st opened it could take months/years.

  • rate this
    +1

    Comment number 364.

    While I'm not anti-capitalist as such capitalism requires the consumer to be able to act perfectly on choice. This is not realistic for a number of reasons. 1. people aren't always (usually) rational; 2. Companies have realised the danger of choice and have emasculated it by providing too much choice. The energy market is one of many examples of this.

  • rate this
    +2

    Comment number 363.

    hmmm..like a lot of other people here I'm not so much lazy as disillusioned. Even if you do brave the price comparison websites and supply all the required information you might find,as I did, that one of the best alternatives was a tariff from my own supplier which they'd never advised me of! It simply isn't good enough to allow energy suppliers to get away with this kind of duplicitousness.

  • rate this
    +1

    Comment number 362.

    p.s. I wonder how many of these pontificating politicians have actually lived in the real world like the rest of us. We don't have secretaries and PAs who can do all our admin and chasing around for us. Personally I like to try & have a life outside of work while I'm still fit enough to do so.

  • rate this
    0

    Comment number 361.

    358 lalalee
    Well said. Once upon a time it was simple, then Margaret Thatcher stepped in and made it a nightmare for the man in the street while the privatised companies were laughing all the way to the bank.

    Let's get back to simplicity.

  • rate this
    +1

    Comment number 360.

    I suppose the right hon member for ministerial pontifications has changed recently? And did it himself? (In both homes?)

  • rate this
    0

    Comment number 359.

    Agreed 100%

  • rate this
    +3

    Comment number 358.

    I blame the governments and that very silly Margaret Thatcher who should never have sold the utilities to private ownership. Utilities should be state owned ALWAYS. There should be one regulated price for gas and electricity and petrol, subsidized and controlled by the government for the good of the people - this is not communism but common sense.

  • rate this
    +2

    Comment number 357.

    The problem is you change provider to the cheapest and hey presto a few months later they are the dearest. All the energy companies are interested in is making a profit for the investors they do not give a thought about the people that they supply its just take take take.

  • rate this
    +1

    Comment number 356.

    If every supplier had only 1 tariff it might help but I found it hard enough trying to work out which of the multiple tariffs offered by my supplier I was signed up to so it was impossible to compare with other companies. I'm more likely to switch to a company with UK call centres regardless of price. Dealing with foreigners isn't worth it when you have a problem that needs fixed. (BT take note)

  • rate this
    +2

    Comment number 355.

    I've looked into this a number of times. The savings are generally minimal (usually less than making sure you get the best tarriff from your current supplier) so you go through a load of hassle and you might save £50 a year as long as the new supplier doesn't just bait & switch you with a price hike after a while. Joke of a market.

  • rate this
    +2

    Comment number 354.

    It's complicated, the returns are negligible and you are likely to be bound into a contract without knowing it. I moved house last December, brought my energy supplier with me and have only just realised tonight that I was tied into a contract for twelve months for the privilege. I agree with a previous contributor, the politicians have failed to turn this into a proper market. So why bother!

  • rate this
    0

    Comment number 353.

    Because half the time they are too damned lazy to do anything about it.

    I've just dumped BT totally because of them using overseas call centres and the poor customer service that comes with such.

    I now have just my mobile and internet access through T-Mobile and I am saving £10pcm. Its just as fast (Broadband) as BT's was too.

  • rate this
    +1

    Comment number 352.

    Changing bank or service may save you money and look good on paper but when it takes over 3 months to get it up and running, several visits into the branch, endless forms and countless phone calls it really just isn't worth the effort. All I want is something that works and doesn't come through my post box every single day pestering me with offers.

  • rate this
    0

    Comment number 351.

    The energy sector is probably one of the few where the cost of competition outweighs any advantages, especially after generators and retailers were allowed to integrate in the late 90's.

    There's a vested interest to stop switching - generators won't build any new power stations if they can't guarantee a return on their investment. No wonder they make it as hard as possible to change supplier

  • rate this
    +1

    Comment number 350.

    I am really impressed. I got away with the b******t word on BBC HYS. Thank God not everything is cen
    .

  • rate this
    0

    Comment number 349.

    lazines

 

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