Big brand companies including BT are deliberately misleading consumers, using techniques developed in North America, to confuse customers into believing that their services are cheaper than they actually are.
The technique, dubbed “confusion pricing”, places the promotion of special and limited offers at the centre of a company’s marketing strategy. It is increasingly being adopted in sectors ranging from financial services to travel and the utilities, as price, rather than branding, becomes the defining factor.
Aside from concerns about the potential damage to the brand, there are wider issues about how confusion pricing is misleading customers and how it may wreck consumer trust. It is all but impossible to calculate how much extra money confusion pricing makes for those com- panies practising it.
The techniques were developed in the hard-nosed US and Canadian telecoms markets by established players in response to increased competition. Their adoption by UK companies owes much to deregulation in existing markets, which explains why observers expect British Gas to develop a similar strategy when the gas market is deregulated next year.
The objective is to confuse consumers about price, making comparison with rivals impossible and creating the illusion that the market leaders are cheaper than their new, upstart, rivals. In essence it is a defensive mechanism.
Though constant special offers are not new to British marketing – high street retailers’ obsession with sales is testament to this – the more sophisticated confusion pricing is now well established in telecoms, travel and financial services as the core element of their marketing strategies.
A Midland Bank spokesman admits that confusion pricing is now at the centre of credit card, mortgage and insurance markets with teaser rates on card fees and mortgages dominating promotions.
Procter & Gamble in the US has actually withdrawn some of its pricing offers after admitting that it was confusing consumers with 55 price changes a day, across 110 brands offering 440 promotions each year.
Last November, the High Court ruled against the Scarborough Building Society for quoting its teaser annual percentage rate (APR) of 1.1 per cent on mortgages but omitting to mention the rise in APR, up to 8.45 per cent in the third year, in its advertising. The case, following a complaint from a trading standards department in Yorkshire, underlined how widespread the quoting of teaser rates as standards was in mortgage advertising last year.
Subsequently, companies have had to be more transparent with what they offer but are continuing, with discounts on limited offers for instance, to confuse and prevent consumers from being able to make accurate comparisons.
Even the Co-operative Bank, which exploits its ethical positioning to maximum effect, is not immune to a little confusion pricing. Its Visa card was launched last year with an APR of only 7.9 per cent and no annual fee. The fact that the APR leaps to 19.5 per cent after July 1997 was only mentioned in the small print.
The bank was also forced to withdraw its instant access savings account before Christmas, after only three months, following a flood of complaints about the severe and unexpected penalties for going overdrawn, which were again hidden in the small print. The advertising only emphasised the five per cent gross interest rate.
There is nothing new about anxieties over what might be lurking in the small print. But there is substantial evidence that this style of confusion has moved to the core of marketing strategies, especially within companies that are being sucked into ever more competitive battles.
A spokesman for P&O European Ferries says: “Until a year ago, the centre of our marketing strategy was to promote on quality and heritage, and the other players like Stena and Sally Ferries fought on price. But competition has become so heavy, with the Channel Tunnel taking such an enormous part of the business, that we have been forced to trade on price.
“It is not just a matter of cutting prices, we have more special offers now than ever before running in the press and on TV, such as 1 trips. It is to some degree artificial and can confuse consumers, but our feeling is that it won’t last.”
He concedes that it could damage the P&O brand but the company sees price as a short-term tool in its marketing strategy. And one it will quickly drop.
In the mobile telecoms market, however, the highly structured pricing systems make it virtually impossible to compare rates between companies. That has led to a series of demands from, among others, the Office of Fair Trading, that contracts be cleaned up.
But the number one player in the UK confusion pricing game is BT. Though it has made across-the-board price cuts – since 1985, BT’s price per minute for national calls has more than halved from 7p to 3p – recently the company has flooded the market with price offers.
Its Friends & Family is the most famous, but the catalogue of new offers has been enormous – weekend rates of 1p a minute; per second charges; peak-rate offers; the Christmas seasonal savers; new international rates; and cutting 20 per cent off calls to Canada and the US, are just some. And there are more on the way. New discounts are being considered, such as special rates for Internet users who use the telephone at off-peak times.
“In the past two years we have done two things,” says a BT spokesman. “First, we have greatly simplified tariff structures and call charges by moving to per second billing, which was confusing for customers. Second, we have confused consumers by introducing more and more flexible discount schemes, making it harder and harder to make direct comparisons, which you could argue does not benefit consumers.”
BT says the reason for the strategy is clear. The pricing ads target the “gatekeepers”, the head of the household – and in the business ads, the company secretaries – who try to discourage phone use. “We had to overcome the false perception of how much a BT call costs. Our research shows that people over-estimate the price by nearly 600 per cent. It inhibits their use of the phone.
“We promote the low price of specific calls in the hope that consumers will start to believe that all our calls are cheaper. It makes us appear more generous,” says the BT spokesman.
The architect of much of this strategy is the Canadian consultant Ed Carter, who worked for the US telecoms group MCI. He developed the direct marketing operation which now bombards potential target groups.
Although BT recently launched its “feelgood” corporate ad campaign – “Always on my mind” – to counterbalance its aggressive marketing, the Abbott Mead Vickers.BBDO initiative is very much a bolt-on to its core strategy. “Pricing is now central to BT, not an added bonus,” says one industry source.
Telecoms watchdog Oftel demands that BT pays for price cuts by reducing operating costs – it cannot cross-subsidise through developing extra revenue streams. Therefore the price cuts cannot be too deep, so they have to create the illusion all BT’s services are cheap.
The BT spokesman says the company had two options – an across-the-board price cut of ten per cent or introducing the voluntary Friends & Family scheme. It went with the latter. “These targeted packages heighten the appreciation of consumers who elect to join them, improving customer satisfaction. Consumers think they have made a wise decision and are constantly reminded that they have,” he says.
He adds that although Friends & Family is not a call stimulation device, customers use their phones more because it adds to the impression that BT is inexpensive. Oftel is unperturbed, saying that BT’s strategy falls outside its remit. “We only deal with substantive price cuts, we are not concerned with how BT structures the cuts,” says a spokeswoman.
But the distinction bet-ween a “sub- stantive” price cut and a series of short-term cuts designed to confuse is a moot one.
Simon Dalby, client services director at WWAV Rapp Collins, whose clients include Orange, Nationwide and Scottish Widows, says the agency’s US subsidiaries are very familiar with the strategy. “Companies in commodity markets are using confusion pricing to stop consumers comparing price,” he says. “If you have a complex pricing structure, it makes it difficult for competitors to say they are cheaper.”
Dalby predicts that British Gas will employ the same tactics next year when there is greater deregulation of the gas market.
Interbrand consultant Karen Hack describes confusion pricing in the UK as a feature of over-competition. “You can now change your bank, change your phone company, change your mortgage and insurance very easily and soon you will also be able to change your gas, water and electricity easily as well. Price is the simplest way to compete,” she says.
But she argues that the brands are suffering. A joint report published last week by Interbrand and Dresdener Kleinwort Benson, called Brands in Financial Services – Where’s the Beef?, points to the widespread use of price-led marketing in financial services. It concludes that brand values are suffer- ing immeasurably from price competition.
“Consumers who take out a mortgage that offers 5,000 cashback, or a 50 per cent discount in the first year, do not care which brand makes the offer,” says Hack, “it just educates them to shop around.”
There are exceptions. Hack points to Barclaycard, which has refused to get involved in price battles but instead emphasises service. “You will not see Barclaycard promoting no-fee cards or low APRs. As soon as it does it will be the death of the brand, because consumers will be forced to compare Barclaycard with other cards on the market.”
Though Barclaycard does offer discounts through its Profile Points scheme, money off Cellnet mobile phones and Ford cars, these are bonuses, not central to the core proposition. “Consumers do not think that Barclaycard is cheap, they think it offers good service,” she adds.
Similarly, BA has a strong service-led brand image, but runs seasonal price promotions such as the “Where is everybody?” campaign.
Interestingly, BT’s competitors see an opportunity to exploit its shift in direction and its adoption of confusion pricing.
Bell Cablemedia – one of the four companies to be merged into the new Cable & Wireless Communications – started an aggressive advertising campaign last week with the slogan “British Telecon”, targeting pricing strategy head on. Marketing director John Aarons says that Bell Cablemedia, which offers prices 25 per cent lower than BT, believes the BT discount schemes are over selective and make it vulnerable to attack.
BT is equally belligerent. “Our competitors prosper by not being totally honest, they don’t quote VAT in their prices: or they have a 2p or 3p per minute fee on top of the price,” says the BT spokesman. He also argues that Bell Cablemedia’s pledge to undercut BT calls by 25 per cent is unworkable. “There is no way, for instance, that it could match our prices in our light user scheme,” he says.
Ironically such rows only reinforce the confusion – after all who is telling the truth? They also serve to emphasise the biggest problem with confusion pricing, which is not the erosion of brand values, but the loss of consumer trust.
It is no accident that confusion pricing is most apparent in the markets where consumer trust is already low – telephony, financial services, utilities and travel. Customers are already hugely cynical about a range of offers in these sectors, from travel companies tying expensive travel insurance to special offers, to water companies increasing the cost of domestic meters.
Confusion pricing is adding to the distrust. Interbrand’s Hack adds: “If the services don’t turn out to be the cheapest, customers become doubly disappointed.” It does not take very long for consumers to realise that all the special offers do not add up to a great deal.
One BT insider voices some of these concerns. “There is a danger that we may end up like the high street retailers, which have year-long sales. Consumers won’t believe the sales are genuine.”
In their rush to import US-style hard-sell techniques, companies have forgotten the consumer. Corporate America may have succeeded in convincing its public that big business is good for America, but that is still far from the case in the UK.
In the short term, the techniques reap rewards for the companies in seducing consumers with more offers.
But in the longer term, the situation will be ripe for a company to come into a market, play the honesty card and say “buy this, it’s simple and cheaper than the rest”.
Before that happens Oftel will lift restrictions on price cuts, allowing BT to develop an even more aggressive pricing strategy which can only add to the confusion.