We hate to lose: The behavioural psychology behind switching tariffs

Is your business overspending on your mobile phone bills, and are you experiencing nasty surprises in your monthly bills? If the answer is “yes” then you’re not alone.

Overage (or overspend) makes up a significant proportion of many of our business clients’ bill spend. More than half of all businesses that have analysed their bills with Billmonitor experience overage.

Furthermore, more than 90% of companies are on the wrong plan, on average paying 41% more than they need to, or £336 per line across the duration of their contract.

Given this tendency to misspend on mobile tariffs, there has emerged a booming industry of price comparison companies and agents who set out to expertly advise consumers and businesses to switch providers and save money. But what’s the psychology behind switching tariffs, and how might it affect the way in which we choose mobile plans for our businesses?

Research, based on Billmonitor data and published in collaboration with the Centre for Economic Performance, demonstrates some interesting findings about what underpins our decisions to switch mobile providers.

We also discuss potential traps in our decision making that experience of bill overage, or indeed lack thereof, may lead us towards.

What does the data say?

The research carried out by the Centre for Economic Performance and the London School of Economics used Billmonitor’s consumer data to analyse the anonymised bills of over 60,000 UK mobile phone users in 2010 to 2012. The study looked at both types of people who were on the wrong tariff: those who were exceeding their allowance and experiencing overage, and those who were on too expensive a tariff.

The data demonstrated that people were six times more likely to switch tariffs if they had experienced overage in past bills and could stand to avoid losing (ie evade the possibility of being charged monthly overage fees). That’s to say, people were six times more likely to switch tariffs to avoid “losing” money through overage, than switch tariffs to “save” money by buying a smaller less inclusive plan, even if the two actually amount to the same savings.

Why we hate to lose

The research demonstrates that, as “prospect theory” proposes, people are far more motivated to avoid loss than to achieve gain. This “loss aversion theory” was first demonstrated by the famous work of Kanheman and Tversky in the 1970s.

This same trend can be seen in our everyday lives. Have you ever been in a cinema ten minutes into a film you’re beginning to hate, and stick with it for another 90 minutes until the end? After all, you’ve bought the ticket and won’t get a refund if you walk out. Here, you’re simply refusing to give up on what you’ve paid for.

Casinos too make money by playing on gamblers’ tendency for loss aversion. In the first round of a game, a gambler is usually playing to win and then the subsequent rounds he is focused on recouping his losses. In business it’s exactly the same, underpinning many of our decisions surrounding expense management.

What can your SME learn from this research, and how to avoid the two key traps?

Like people, companies on the wrong mobile tariff plan fall mainly into two categories – those that exceed their allowances and experience overage, which would benefit from increasing their allowances and/or adding appropriate bundles, and those that are on a tariff that is too large for their needs. Like people, in our experience, businesses which have experienced bill overage are more likely to switch.

There are two main traps that you should try to look out for:

1. If your company has experienced bill overage, you’ll be more likely to switch tariffs to try to avoid future “losses”. While that’s a good motivation to switch, it’s important not to swing too far in the other direction: if your instinct is to get a “safe” plan to ensure avoiding future losses, be aware that you may easily end up with a wastefully large tariff, in turn setting you up for a significant overspend over the term of your new contract. Allowing for the right amount of buffer and judiciously choosing the right bundles matching your company’s usage is the key to choosing the right tariff. So before taking advice about a larger contract from a willing agent, be sure to do your own homework as we discuss below.
2. If your company has rarely or never experienced bill overage, that’s an indication that your contract could be too large for your needs. While you may be feeling secure in the absence of nasty surprises, you’re likely silently wasting valuable pounds each month. Moving to an appropriately smaller (yet still safe) tariff matching your usage is the key to realising 41% savings on average.

Being aware of how the expense management industry works, as well as the intrinsic biases in our decision making, will enable you to make more informed choices in finding the right plan. After all, marketeers have, for a long time, preyed on our very human tendency to make changes to avoid loss than to make a profit.