Of all the big, landmark events in regulated markets last year, one of the most significant was Citizens Advice’s super-complaint about the ‘loyalty penalty’.
Levelled against firms that were seemingly charging their loyal customers more when renewing their contracts, the super-complaint aimed to bring to light the issue of long-term customers receiving poor value for money.
It was only during pre-Christmas festivities that the Competition and Markets Authority (CMA) set out their response to the super-complaint, so you would be forgiven for having missed the announcement. The response went on to propose eight key reforms that the CMA would like to see applied across the five key markets targeted in the complaint: mobile, broadband, cash savings, insurance, and mortgages.
This situation should be seen as the widening of a discussion already underway. The FCA, OFGEM, OFCOM, and OFWAT have all launched ‘value for money’ initiatives, as have other regulators. In every sector and for every product – from mobiles to mortgages, from car insurance to capped tariffs – the onus is on providers to demonstrate that they value their customers (both new and loyal) by offering them value for their money.
But how can you achieve value for money?
It’s a question that every firm will be asking themselves over and over again throughout 2019; How do we really deliver value for money? While, on the face of it, this should be as simple as “delivering the highest possible quality for as low a cost as possible”, the reality is that things are a lot more complicated than that.
Here we outline a few considerations for when you start asking yourself the big question:
“How much do we value 'value for money'?”
First, consider what “value” actually means for you and your firm. Do you aspire to be the most competitive on price? Or to offer a bespoke product or service that people will pay extra for? What is your target market? Are there any product features that they will value over and above a basic, ‘vanilla’ offering? It is, of course, usual for different stakeholders to have different priorities here, so be prepared for some interesting (perhaps heated) discussions.
Next, you will need to ensure that you have a robust product review process in place. Do you have a methodology that uses a combination of different benchmarks to demonstrate how a product is performing? These could be financial or customer-based benchmarks, for example:
- Fund objectives
- Performance against indices (RPI, CPI)
- Satisfaction levels
- Customer persistency
- Complaint volumes
Do you seek to put a monetary value on product features that are included ‘for free’? And do you reconcile all of these metrics to form an objective view?
Also, be sure to watch for indicators of poor value. These could include:
- Low claims frequencies or claims acceptance
- High commission levels
- ‘Excessive’ profitability
- Exit fees and barriers to switching
- High fees and charges
- Overly restrictive terms and conditions
- Reliance upon obscure legal terminology in client agreements
There are a number of, perhaps, more difficult questions to answer. For example, if some of your customers are paying more than others for the same product or service, are the terms of this cross-subsidisation fair on the customer group(s) paying more? How does this impact on value for money? Is there a plan to narrow the gap by moving the new customers to a more aligned price point?
Demonstrating and delivering value
Being able to demonstrate value for money will depend not just on how you respond to the prompts above, it also involves ongoing monitoring of the various criteria you have selected in your management information. ‘RAG’ (a system based on the traffic light colours of 'Red, Amber, Green') ratings are essential in order to keep senior leadership informed of how your products are performing. These should, of course, align with your overall corporate risk appetite.
Determining and demonstrating value is a journey that all firms will need to embark on, regardless of their market and sector. It’s not just the regulatory imperative either, consumers are becoming far more aware of the respective merits of the product they are buying thanks to easily accessible online information.
When it comes to ensuring your firm offers value for money, considering your definition of value – and reviewing whether it is being delivered on an ongoing basis – will help you deliver it.
For a more in-depth discussion on the continuing 'value for money' debate, be sure to sign up for regular insights. You will soon receive our upcoming White Paper, A fair price for loyalty in the insurance industry, detailing the issue of fair pricing within the general insurance sector.