The high price of loyalty

Saturday, October 15, 2011

It's a vexing part of being a consumer in America. Companies roll out the hot deals to lure potential customers, leaving existing customers in the cold.

So what's a price-conscious consumer to do?

Calculate the "personal life hassle cost." That's University of St. Thomas business professor David Vang's term for switching costs -- the time, energy and in some cases money that it would take to go from one company to the other. Banks, insurance companies and cellphone providers know how annoying and cumbersome it is to switch from one company to another, so they "know they have some wiggle room to raise rates" before someone is likely to leave, Vang said. Companies also benefit from consumer knowledge that these introductory pricing ploys are common practice. Why go to the hassle of switching when you know the new company will hike your bill in a matter of months?

Before jumping ship, customers should estimate the time it will take to unwind from one company and take up with another. Put a dollar value on that time based loosely on your current wage. Take that number and divide it by the amount of anticipated monthly savings to determine how long it will take before you break even. Vang notes that transitions can be messy, so be sure you have enough money in savings to handle double-billing or other errors that may occur.

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Originally published: 10/15/2011, Star Tribune - Your Money Blog