The Margin of Financial Acceptance

2022, Jun 12    

Recently my car insurance was due for renewal and (with no surprise to anyone) my premium had increased despite no claims / no points on my license / no change in circumstance. Given the lack of justification as to why I should pay more I decided to use a comparison website (one that I have used in the past) to see what other providers would charge for the same level of coverage.

The results came in as quick as one would expect, and the different prices ranged from cheaper by about 10% to ridiculously expensive (some companies clearly don't want the business). What peaked my interest with the price comparison was the difference between the few cheapest that were returned, my payment for the previous year, and my renewal quote.

The 9% number got me thinking, at what point do we decide that an increase is too much and is worth the effort to change provider? 9% doesn't sound as bad as 10% as it isn't double digits, the amount is noticeable but not insurmountable, so is there a psychological aspect to this?

Thinking about the average shop/supermarket, is this a similar approach to that of the left-digit effect (where the digit to the left of the decimal point can have a disproportional effect on any digits to the right). It's difficult for even the most experienced shopper to actively think that £9.99 isn't significantly better than £10, yet we still gravitate to the mindset of "it's less than £10", even if its only a penny cheaper.

While the percentage increase on my car insurance lacks a decimal point (unless I work out the difference down to the pence), it does seem to be a good example of the left-digit effect, and a potential game of psychology here. Too large of an increase and the customer looks elsewhere, too small of an increase and your profiteering suffers, but find the right increase and people will take the hit and not question it any further.

This does remind me of mobile phone companies and their contracts making the news a few years ago, and how people would still be paying for a handset that they now owned, or that incremental price increases would take place with no extra value gained and no justification as to why. Thankfully this was spotted and dealt with in the end, though I suspect it still takes place at some level.

The lesson here; Even when an increase seems small/insignificant, don't downplay the importance of checking for a better offer elsewhere. With the technology/services available today it's easy to check if you could save money. Don't pay extra for services when it's a bad deal.

An interesting read for those who are curious about the psychology behind pricing: Psychological Pricing Guide