Hi all,

I've got a question. Maybe somebody can shed some light.

For my sins, I happen to bank with Alliance & Fester. These people love nothing so much as telling you to ring their little 0870 number. When you go into the branch to request such things as whether you can get a credit card, or setting up a standing order, their reply is a cheery "Sure, just call this number. Here, I'll write it down for you". I wait with baited breath. Sure enough, there we go, it begins with those ill-fated four digits and my heart sinks.  Even when I wanted to confirm a change of address, they want me to call them on their favorite little number. 

But I've noticed, before they write down the number, they ask me what kind of account I have. It's just a standard current account, so I get the 0870 number. Upon perusing their literature, however, I've noticed that if you have the next account up, the classier one, you get an 0845 number. Then if you get right to the top of the tree and have some sort of platinum, or gold, or whatever is the base metal of choice, account, then you get a geographic or perhaps even an 0800 number. Yippee!

My question is, really, why is this? Why the price-gouging 0870 number only on the low-grade scum accounts. And I want to try to think of this from a cool-headed economic point of view.  What rational self-interested profit-maximizing reason would a firm such as this have to collect revenue in this way only on the low-end accounts.

The high-end accounts tend to have a monthly fee so you might say they've already collected their money. Then they can give you free calls. But it is often argued that the same amount of revenue will have to be collected somehow in order for the company to break even. All the banks are competing, the theory goes (go with it for a second), and they will want to set their prices so that they maximize profits by without losing sales to the competition to the extent that profits start falling.

So what's going on is a curious redistribution of price collection. In the lower end accounts it is collected through telecoms revenue share in addition to the usual methods, but in the higher end accounts only the usual methods are used. Why restrict this potential cash-cow to the lower-end. Is it because wealthier people are more sensitive to being charged for 0870 numbers, so that they will turn away to competitors more that less wealthy ones will? In one way this is counter-intuitive because wealthier ones should not care so much about a small incremental charge.

I am sure other banks are scaling things in this way too. There must be something in the structure of the market which is encouraging firms to target 0870 tolls at the lower end of the market. I find it interesting, because I think it might shed some light on the way in which the 0870 market works and hence provide grist for the mill in our argument against them.

To put the thought another way, you would expect that if people don't like using 0870 numbers, competitive pressures would prevent banking firms from using them. Evidently that is not happening at the lower end of the market, but it may be happening at the higher end. Why would these pressures only operate at one end like that?

Just what is going on? 

The only explanation I can think of is the people on the lower end of the market tend to live more spontaneously from moment to moment and are less likely to look at their monthy phone bills and to be aware of the aggregate cost of these small incremental charges. If that is the case, one could argue either way. You could say, if consumers behave that way, they deserve what they get. But on the other hand, you could say, just because people are dumb enough to be duped, doesn't mean it's right to dupe them.

Sorry for going on so long again.  Can anyone help me with this?

longusername wrote on Dec 16^th, 2005 at 1:19am:


Thanks for raising this, Lun.  This is the first I was aware that companies offer 0800 numbers to 'gold' customers, 0845 to 'silver' and 0870 to the rest of us.   This is shockingly deliberate on the part of Alliance and Fester.  I've no big answers - do they assume that if a customer has less money then they're more easily parted with what money they have?  Shameful ! 

I wonder, do other companies adopt this practice?

MC661 got me thinking.

Quote:


If that is the case, then we could explain the 0870 usage on the most basic accounts, namely, the presumably unprofitable ones the banks are required to supply by law, as being merely an additional legal revenue collecting technique the banks can employ, and one which does not damage profits, no matter how unpopular it is with customers. If I am right in assuming these accounts are being provided at a net loss, then it would maximize profits for the banks to reduce the number of holders of these accounts ideally to zero, so the unpopularity of 0870 would be a boon rather than a hindrance to maximizing profits and normal forces of market competition do not apply, or perhaps even apply in reverse.

Does that analysis seem plausible?

If there's any truth in it, it does give rise to the question of whether the banks ought to be allowed to charge by the back door, namely through call revenue sharing, for accounts which are legally required to be free? Certainly, I can only imagine that if ofcom prove as good as their word and abolish revenue sharing on 0870 numbers, it will be difficult for banks to legitimate the use of more overtly "premium" rate numbers in place of the old "national" rate ones.

We will see.