This week in pricing: Atlantic price wars, increasing energy bills and pay-as-you-throw rubbish

4 million homes face gas bill increase of £60

Both British Gas and EDF have been in the news this week for announcing price increases. British Gas has announced a £60 increase on its standard variable tariff whilst EDF will be adding between £16 and £28 per year.

Gas and electricity price hikes are always front page news. Enough that politicians (even Tory ones) have eventually seen political merit in price controls. But the irony is that this is a sector with margins of ‘only’ 4-7%. OK, these are reasonably solid for what could be labelled a true commodity, but pale against other commodity utilities such as telecoms with it c. 25% margins. The UK is also a very competitive energy market and, based on my recent experience, it is pretty easy to switch supplier.

Somehow the energy sector has managed to create a consumer narrative solely around price and has lost its pricing credibility. If customers honestly thought that price levels were too high they would be spurred to shop around. I think it is the reaction to the lack of transparency and the inability of the big firms to create a story around their pricing that is the root cause of the issue. Telecom turned price points into products… energy preferred to make their pricing impenetrable to the world.


Renewable energy for everyone?


 

Pay as you throw rubbish

The catchily named Local Authority Recycling Advisory Committee (or LARAC) has floated ideas to charge households based on the amount of rubbish that they throw away. Recycled waste would be free or a very low price, and all other waste would be weighed and charged accordingly.

Initial reactions are mixed at best. And the fact they are mixed should be no surprise. As soon as a pricing model is changed from a flat rate to a pay-as-you-go (or in this case pay-as-you-throw) it impacts different users differently. Moreover, it moves away from simple and predictable to variable and complicated. But, it is unarguably fairer. And there is the rub. It is virtually impossible to have a single price model that is both predictable AND fair. And most of us, it turns out, are happy to pay a bit more for predictability. Under this scheme many might actually end up paying less, but may well prefer to pay more if they don’t have to think about it.

 

BA launches hand baggage only long haul tickets

BA has said it will launch “basic” fares starting at £143 on a number of long haul routes between London and the US, Caribbean and Far East. The fares are about £60 cheaper than the standard fare, but passengers will have to pay to check luggage and choose a seat. This is in response to a price war that is rumbling over the Atlantic with the low cost carriers, most notably Norwegian. It is always going to be a challenge for a ‘premium player’ to compete on price with low cost rivals. I think what they have proposed is about the smartest way they can do it (that is of course unless their latest plan to simply buy Norwegian to solve the problem doesn’t work). As the premium player (with an incomparable quality level and most importantly cost profile to a low cost player), the smart move is not necessarily to have lower prices, but to have more prices. Not to rebase the standard price but to slot in something underneath with a more truly comparable value proposition to the low cost competitor. Now, if you want a price more like Norwegian then you can have an experience more like Norwegian. I also imagine that once the lower price point has brought the customer to the shop, the upsell to the standard fare will be reasonably easy (at least for a sizeable segment). So they may end up in the perfect spot: advertising low entry prices but realising higher average prices.


Rethinking price wars

Simon-Kucher's Travel, Tourism & Leisure expertise


Catch up on last week's news: The sugar tax, exhibition ticket prices and autograph inflation