The practice of large companies incrementally raising premiums for long-term customers on goods and services they provide is known as ‘loyalty tax’, and Australia is particularly notorious for it.

These companies slowly increase margins on their ‘back-book’ (medium to long-term customers), making them more profitable than the more competitive ‘front-book’ (recently acquired customers). They are able to do this because Australia’s distance and scale make it a relatively uncompetitive market, in which companies can leverage their dominance to overcharge.

Tax and bills.
Energy companies have been the first to be targeted by new reforms around ‘loyalty tax’.

In the global context, Australia’s economic environment is becoming even less competitive. Whereas in 2004, Australia was the world’s 9th most competitive economy, today it is the 21st. From this came the moniker ‘treasure island’, an appealing place for businesses to charge customers higher margins than the global norm.

But as anxieties around cost of living in Australia soar, service providers will likely see regulatory reform that impacts business models that take advantage of loyal customers. Indeed, the ACCC is overtly and publicly penalising providers who short-change customers and fix prices, notably Sony, Kogan and Garuda in recent days.

If businesses cannot address this practice among their own ranks, they risk serious economic and reputational damage.

A changing tide

Ipsos’ April 2019 issues monitor demonstrates that Australia’s growing cost of living is the most significant concern for Gen Z, Millennials and Gen X in Australia.

In accordance with rising living costs in Australia – especially in cities – an undercurrent of resentment about companies overcharging loyal customers has built into a tidal shift.

In 2017, then Energy Minister Josh Frydenberg compelled electricity retailers to inform customers of the end of their initial discount period and inform them that, if they did nothing, their electricity prices would increase.

The electricity industry has been the first to face serious regulatory reform, but the recommendations in the banking royal commission, based on the finding that large banks were overcharging long-time customers by around $850 a year, indicate that all sectors will be held to account.

No industry is safe from this kind of scrutiny and reform, and the ACCC has been clear and unequivocal: these reforms will damage revenue for companies affected by them.

This provides threats and opportunities for Australian businesses. 

For challenger brands, campaigning to implement these reforms is a cost-effective way to acquire new customers. For established brands, there is significant risk unless they can transition to a model that is not based on slugging loyal customers.

Industry re-regulation will be complex. Aside from re-strategising to enhance revenue in other ways, companies will need to reconsider their regulatory and government affairs strategies and deftly negotiate external and internal communications in times of change.

Consumer-focused messaging must emphasise transparency, accountability, and a people-before-profit mentality. Internal messaging, on the other hand, must manage the potential internal structural changes necessitated by regulatory reforms.

If the government acts to end the loyalty tax in your industry, is it an opportunity or a threat?

For advice on regulatory reform, strategy and government affairs, contact The Civic Group on +61 3 9620 9300 or info@thecivicgroup.com.au