Trustpower takes multi-period pricing a bit too far

Last week in ECON100 we covered pricing strategy. Part of that topic looks at customer lock-in and multi-period pricing. Customer lock-in occurs when customers find it difficult (costly) to change once they have started purchasing a particular good or service. Customers are typically locked in because of high switching costs (literally the costs of switching from one good or service to another). Switching costs might include contract termination fees, but also include other costs such as the cost of searching for an alternative good, and learning how it works, etc. It is these high switching costs that prevent customers from changing to substitute products.

Firms can take advantage of having locked-in customers through multi-period pricing. This occurs when the initial price is low (to attract customers) and then the price is raised once the customers are locked in. Multi-period pricing only increases profits if the customer is locked in - if the customer is free to move to other providers, then when the price is increased they are likely to do so. There are lots of examples of multi-period pricing - one of my favourites is that it is a good explanation for why drug dealers give away free samples of their highest-quality (and most addictive) product.

So, it was interesting to read this article in the New Zealand Herald last week, about the strategy employed by Trustpower:

Trustpower has been hauled through the courts and fined $390,000 for misleading consumers over a campaign for an unlimited broadband deal.

Between March and July last year, Trustpower promoted a $49 a month for 12 months unlimited data broadband plan, under the campaign theme: "Good things happen when power and broadband get together." ...

However, the $49 price was available only to customers who signed up for power and broadband at the same address on a 24-month contract term.

For the last 12 months on the contract the cost jumped to $79 a month and if a customer wished to cancel the contract at any time during the 24-month period they would incur exit fees.

This is a classic example of multi-period pricing, supported by locking customers into a contract through the use of a high termination fee. It is worth noting that the Commerce Commission took issue not with the multi-period pricing strategy itself, but with the way it was marketed - the increased price over the second 12 months of the 24-month contract was buried in the fine print of the advertisements for the deal. If Trustpower had been more up-front about the terms of the deal, it wouldn't have attracted the Commission's attention (but it might not have attracted as many consumers' attention either!).