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Valuing, not punishing customer loyalty

How loyal customers are treated is once again in the headlines following recent investigations by the Competition & Markets Authority (CMA) and the Financial Conduct Authority (FCA). They have found that, instead of being rewarded for fidelity, consumers often encounter a so-called ‘loyalty penalty’ for sticking with their insurance, broadband or mobile phone provider. This is reported to be costing UK consumers £4bn per year in excess charges.

Damaging practices

In December 2018, the CMA published its findings and commented on the many damaging practices that exist including year on year stealth price rises; costly exit fees; time-consuming and difficult processes to cancel contracts or switch to new providers; and companies requiring customers to auto-renew or not giving sufficient warning their contract will be rolled over.

Loyalty penalties are widespread - a staggering 47 per cent of people or 12.4 million households pay a loyalty penalty for their home insurance and it isn’t just small amounts. According to the FCA, a home insurance customer who has been with the same firm for five years can pay 70 per cent more than a new customer.

As a result, the CMA outlined a number of recommendations. With regards to the insurance industry, it suggested that the FCA “look closely at pricing practices and take action to prevent people being exploited by firms. This should include considering pricing interventions.”

This investigation is a damning indictment on the industry. There is nothing worse than consumers feeling like they are being ripped off and are not valued by companies. These practises negatively impact trust in insurers and breed scepticism, dislike and alienation. It is the exact opposite of the sort of relationship financial service providers are aiming to build with customers.

Positive emotional connection

It is really important that customers feel warmth towards the companies they do business with because otherwise they can easily become disillusioned and switch. Customer Thermometer found that the primary reason customers connect with a brand is that it shows it cares about them. Similarly, research shows that a long-term customer relationship happens when companies become a genuinely meaningful part of a customer’s everyday life. Customers need to sense that they matter and receive benefits and services that make a real difference to them and transition the relationship from the functional into the enjoyable. 

Only when this happens, will the loyalty penalties conversation move on. The focus will no longer be on price alone. Instead, consumers will genuinely feel they are getting additional value from insurance providers and that even if the annual renewal price is more than others, they will perceive that the benefits of staying outweigh the savings of moving.

Rewarding loyalty

So how do insurers get to this place? How do companies know what products will connect with specific customers? Much can be learned from observing trends within the retail sector. Here, many traditional, points-based reward schemes are being overhauled as retailers look for ways to encourage long-term usage and deeper engagement, rather than short-term sales and deal-hunting. In April 2018, Sainsbury’s announced it was looking to “genuinely reward customers” for choosing Sainsbury’s and wanted customers to receive points based not just on how much they spent, but also on how frequently they shopped and how long they’ve been shopping with the retailer.

Similarly, in 2017, Sky launched Sky VIP, the first loyalty scheme in the TV and broadband sector, with the aim of rewarding customers for their loyalty. Its programme included four tiers based on how long people have been with Sky and the rewards and offers (such as free tickets to Premier League football matches, cinema previews or competitions to win “money can’t buy” experiences) increase as the years go on.

Sky’s head of loyalty, Rob Chandler, explained: “It’s about us looking after them, not demanding their loyalty. The tenure framework really gives us permission to do that because it’s all about how long we’ve been together. For us, it’s recognising the value of customers, their importance to us and making customers feel more valued – that emotional connection.”

Making it personal

This is a great example of a company trying to become a meaningful part of a customer’s everyday life and offering benefits that really connect on an emotional level. 

A ‘one-size fits all’ approach will no longer work. To be effective nowadays, loyalty programmes must be hyper-personalised and with customer approval, businesses can access vast amounts of data, from multiple touchpoints, to make this possible.

At the click of a button, organisations can know a customer’s favourite sports teams, where they like to go on holiday or how active they are on social media. This information can be harnessed to create rewards and experiences that are tailor-made for them. Offers such as exclusive events, relevant store discounts and priority restaurant reservations enable brands to give a highly personalised experience and will help drive advocacy.

Being on hand when it matters

Another way to cultivate engagement and strengthen the consumer relationship is to show yourself to be a trusted partner in a crisis. By providing, for example, cybercrime protection services an insurer can move from being seen as an anonymous supplier to a company that is able to guide a customer through a stressful and unknown situation. 

Consumer concern about cybercrime is high but that does not translate into knowledge about how to protect, detect and resolve an attack. Consumers feel vulnerable and any company that can step into that knowledge gap and provide support will be rewarded with increased brand loyalty.

An amazing opportunity exists for insurers to help customers better protect their identity and data, and provide resolution support should they suffer a cybercrime. It is a key way that insurers can differentiate themselves from the competition, show they care about their customers’ lives and establish a meaningful and long-term relationship with them.

This is the holy grail for financial services companies. Insurers must invest in loyalty programmes and engagement solutions that drive deeper connections with customers and give them more reasons to engage and stay longer. This will move the debate beyond price, improve the customer experience for all and restore the reputation of the industry.


Comments: (3)

Melvin Haskins
Melvin Haskins - Haston International Limited - 01 April, 2019, 10:29Be the first to give this comment the thumbs up 0 likes

I stuck with CIS (Co-operative Insurance Services) for more than 20 years when insuring my house and contents. The last quote three years ago being UKP 3,300 (I live in a large house). I got four quotes from well known and reputable companies, all of whom quoted less than UKP 800. I was simply amazed. When I corresponded with one of the directors, they were simply disinterested. They offered no explanation nor made any attempt to keep my business. As a result, I tell anyone and everyone what a callous and uncaring organisation that they are.

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 01 April, 2019, 11:06Be the first to give this comment the thumbs up 0 likes

Consumers rightfully feel cheated by stealth price increases when they exhibit loyalty by making renewals with the same company. OTOH, companies invest in loyalty programs with one key goal, namely, increase ticket size per member-consumer. One of the ways by which this goal is fulfilled is by making stealth price increases for renewals. This is indeed a major conundrum. Short of regulation, I don't know how it can be eliminated. But, I also don't know how regulation can be framed, keeping in mind free market principles.

A Finextra member
A Finextra member 05 April, 2019, 13:22Be the first to give this comment the thumbs up 0 likes

As experts in loyalty and FS, Motif are very interested in how CMA and FCA recommendations and proposed interventions will influence the strategy and actions of FS providers. We completely agree that customers need to feel rewarded for their loyalty, be close and personal to their customers, and meet their needs when it really matters i.e.pain points. In fact we have a  framework which decodes the drivers of loyalty for different FS products. Loyalty a complex area that FS providers are increasingly taking very seriously.

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