Higher Prices: The Odd Reward for Being a Loyal Customer

Businesses Overlook Existing Customers to Attract New Ones, Raise Profits | Moneyland | TIME.com /* */ Home TIME Magazine Photos Videos Specials Topics Subscribe Mobile AppsNewslettersRSS @TIME NewsFeed U.S. Politics World Business Money Tech Health Science Entertainment Opinion SEARCH TIME.COM Full Archive Covers Videos Saving & SpendingBankingBorrowingBudgetingCredit CardsIdentity TheftOdd SpendingSavingSmart SpendingTaxesPlanningDecision MakingEducational FinancingEstate PlanningInsuranceRetirementInvestingBondsMarketsPortfolio StrategyStocksWall StreetReal Estate & HomesForeclosuresHome ImprovementHome-Equity LoansMortgagesReal Estate MarketsReverse MortgageCareers & WorkplaceCareer StrategiesJob MarketsSmall BusinessesWork/Life BalanceEconomics & PolicyFinancial Values SurveyFinancial ReformPsychology of MoneyScamsThe EconomySpecials Psychology of MoneyHigher Prices: The Odd Reward for Being a Loyal CustomerBy Brad Tuttle | @bradrtuttle | October 18, 2011 | View CommentsTweetPhoto-Illustration by Alexander Ho for TIME; Getty Images (2)

New customers are routinely wooed with special discounts for services like pay TV and newspaper subscriptions. Existing customers, on the other hand, can expect regularly escalating bills unless they put up a fight or beg for a price break. Why do businesses treat loyal customers this way?

The short answer is that the pricing structure that favors new customers makes business sense, even though it’s also guaranteed to annoy many existing customers. Jacking up prices is standard business practice for pay TV, wireless plans, and newspaper and magazine subscriptions, and the short-lived special perks and introductory rates on credit cards and bank accounts work in the same way too.

But shouldn’t a business give the best treatment—along with the best prices—to its best, most loyal customers? That’d be nice, but it’s not the way things play out in the marketplace.

(MORE: Customer Service Hell)

A Minneapolis Star-Tribune column explains that, as odd as it may sound, new customers who have never given a company a dime are valued more than existing customers who have been paying regular monthly bills for years. Or at least a business’s ability to attract new customers is valued more highly by investors:

“New acquisition looks good for investors,” explains David VanAmburg, managing director of the American Customer Satisfaction Index, which tracks how happy customers are with everything from TV service to pet food. Unfortunately, shareholders, not customers, rule.

Once a customer is on board, the typical business M.O. is to maximize the amount the customer will spend, hoping that some combination of appreciation for the service and the inertia causing consumers to stick with the status quo allows the business to make larger profits without causing the customer to cancel the service or otherwise jump ship. Businesses bank on the “personal life hassle cost”—a phrase summing up the time, energy, and other hassles required to switch service providers—as an argument for customers to just submit to higher bills. It is someone’s job (probably, many people’s job) to carefully calculate how to sneak in incremental price hikes without overdoing things and chasing away customers.

This business model creates profits, at least in the short run. What it doesn’t create are genuinely loyal customers—just ones who stick with the company because they don’t want to be bothered to cancel.

(MORE: Raise Prices in a Slow Economy? Nice Try)

Psychologists call the tendency to avoid change and stick with the familiar “cognitive fluency,” and it affects consumer behavior, and the way consumers are treated by companies, in obvious ways. At some point, a company is likely to overplay its hand and raise prices too quickly and without adequate explanation or justification, and its mildly annoyed customers will get annoyed enough to drop the service. Just look at what’s been happening with Netflix.

Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.

Read other related stories about this:The high price of loyaltyStarTribuneRelated Topics: bills, brand loyalty, cognitive fluency, inertia, pay TV, utilities, Banking, Credit Cards, Economics & Policy, Psychology of Money, Saving & Spending, Smart Spending
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NYC Official: Occupy Wall Street Cleanup Is Being Postponed

Demonstrators with 'Occupy Wall Street' protest at Zuccotti Park in New York on October 13, 2011 the day after Mayor Bloomberg gave a message to Occupy Wall Street protestors that the park needs to be cleaned. Protestors, signs, and sleeping bags need to be temporarily vacated from the premises while the park's property owner can go in with a cleaning crew starting Friday.

TIMOTHY A. CLARY/AFP/Getty Images

Updated: Friday October 14, 6.30am ET. As the days ticked by, September rolled into October and the Occupy Wall Street movement dug in at Lower Manhattan's Zuccotti Park, a question loomed: How long would they stay once cold weather came?

But a potential flashpoint was averted early Friday. New York City Deputy Mayor Cas Holloway has confirmed in a statement that the proposed cleaning of Zuccotti Park has been postponed at the request of its owners Brookfield Properties. The news brought cheers from those in attendance, who believed the cleanup was a pretext to kick them out.

"Late last night, we received notice from the owners of Zuccotti Park – Brookfield Properties – that they are postponing their scheduled cleaning of the park, and for the time being withdrawing their request from earlier in the week for police assistance during their cleaning operation," the statement read. "Our position has been consistent throughout: the City's role is to protect public health and safety, to enforce the law, and guarantee the rights of all New Yorkers. Brookfield believes they can work out an arrangement with the protesters that will ensure the park remains clean, safe, available for public use and that the situation is respectful of residents and businesses downtown, and we will continue to monitor the situation."

It's been reported that between 600-700 protesters had arrived by the early morning on Friday as they set about mopping, collecting trash and scrubbing the pavement.

Earlier in the week, on Wednesday, New York Mayor Michael Bloomberg's office had released a statement that the park, where protesters have made their camp for more than a month, would be cleaned on Friday. The announcement said that the cleaning would be done in stages, and that afterward, protesters "will be able to return to the areas that have been cleaned, provided they abide by the rules" established for the park. The statement came just two days after the mayor spoke at the Columbus Day Parade and said that the protesters could remain indefinitely, but the harsh winter weather would likely drive them out.

(MORE: Why the Washington Establishment Is Heeding Occupy Wall Street)

The day after the mayor's speech, however, Richard Clark, CEO of Brookfield Properties, the company that owns Zuccotti Park, sent a letter to NYPD Commissioner Ray Kelly asking for assistance in clearing the park so that it can be cleaned. Clark's letter explained that the park is usually cleaned each day, and that they are concerned about possible damage from the month of occupation. The park has lighting in the ground, which if cracked, the letter explained, could cause an electrical issue with recent rains. "In light of this and the ongoing trespassing of the protesters," the letter said, "we are again asking for the assistance of the New York City Police Department to help clear the park," so that the company could undertake the cleaning.

While the word itself has not been used, the protesters saw the initial letter as a notice of eviction. The movement put out an "Emergency Call to Action" on its website, asking for supporters to come to the park Friday at 6 a.m. "to defend the occupation from eviction." And sure enough, they streamed there in their hundreds.

From their perspective, had they been forced from the park, the movement was worried that, even if they were allowed back in, their efforts to occupy the space may die. The OWS website says that the rules of the park include no sleeping bags or tarps and no lying down.

(PHOTOS: Labor Unions March with Occupy Wall Street Protesters)

If such rules are eventually enforced, it would mean an end to the occupation in its current form. At 2 a.m. Tuesday, my last trip to the park, people were sleeping in clusters around the trees, bundled up in sleeping bags against the chill. The NYPD forbids the erection of structures, but protesters have used tarps since the beginning days to protect themselves from the rain.

The NYPD had said that they will begin the clearing Friday morning at 7am. The response from the protesters on their Facebook page read, "We'll position ourselves with our brooms and mops in a human chain around the park, linked at the arms. If the NYPD attempts to enter, we'll peacefully/non-violently stand our ground and those who are willing will get arrested."

The Friday morning showdown could have been much ado about a spray wash, or perhaps a seminal moment in an increasingly growing movement. Despite the postponement, the same scenarios remain in play if and when the cleaning does eventually take place. If the protesters did decide to leave, it's not clear where they would go to continue their efforts. As the sun came up on Friday morning, Occupy Wall Street, in so many ways, has not been cleared up.

MORE: Police Use Pepper Spray on Wall Street Protesters

Nate Rawlings is a reporter at TIME. Find him on Twitter at @naterawlings. Continue the discussion on TIME's Facebook page and on Twitter at @TIME.

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Physics Nobel: Why Einstein Was Wrong About Being Wrong

The research that leads to a Nobel Prize in physics can sometimes be a little obscure. In 1990, for example, three scientists got the nod "for their pioneering investigations concerning deep inelastic scattering of electrons on protons and bound neutrons." Got that? The next year, the prize went to a scientist "for discovering that methods developed for studying order phenomena in simple systems can be generalized to more complex forms of matter."

But sometimes, you just can't help saying, "Wow!" and maybe: "What took the Nobel folks so long?" That's what Adam Riess's friends kept asking him — and this morning at 5:30, the phone finally rang. "I knew that was the famous time," says the Space Telescope Science Institute astronomer. "The voice sounded Swedish, and I was pretty sure it wasn't Ikea." Sure enough, Riess and two other astrophysicists had just been awarded the 2011 Nobel Prize for the astonishing discovery a little over a decade ago that the universe is expanding faster and faster as time goes on. The most likely reason: a mysterious cosmic force known as dark energy. (See photos chronicling the life of Albert Einstein.)

Riess and his collaborator Brian Schmidt, of the Australian National University, had no intention of discovering dark anything when they launched the High-z Supernova Search in the mid-1990s. Neither did Saul Perlmutter, of the Lawrence Berkeley Laboratory, when he and his colleagues started the competing Supernova Cosmology Project. Both teams knew the universe has been expanding ever since the Big Bang. The question they wanted to answer: Is the gravity of 100 billion galaxies, all pulling on one another, slowing the expansion down? And if so, by how much?

To get the answer, the scientists looked to supernovas — exploding stars so bright they can be seen all the way across the universe. The farthest of these cosmic bombs detonated when the universe was still young. It's taken billions of years for their light to reach us, so that light is a snapshot of what the expansion looked like back then. The closer ones are a snapshot of more recent conditions. Once the astronomers found them, they clocked the supernovas' speed — and thus, the expansion speed of the universe at different eras — by measuring subtle features in the wavelength of their light.

What they found, to their astonishment, was that the universe wasn't slowing down at all. It was speeding up. "We spent at least a year struggling to understand what we were seeing," Perlmutter told TIME. In the end, improbable as it seemed, both teams concluded independently that there must be some unseen, unknown force pushing the cosmos apart. Their joint discovery was named Breakthrough of the Year for 1998 in the journal Science. (Read to see if Einstein was right about dark energy.)

What's even crazier is that just such a force was predicted, nearly a century ago, by Albert Einstein himself. When he put together the equations of general relativity back in 1916, Einstein applied them to the universe as a whole. To his consternation, they predicted that if the universe wasn't expanding, it should be collapsing. It seemed obvious that it wasn't expanding — but since it wasn't collapsing either, something must be propping it up. Einstein called the something the cosmological constant and added it to his theory with some distaste, because the work had been so mathematically beautiful without it.

Then, a decade or so later, Edwin Hubble discovered that the universe is expanding after all. Einstein abandoned the cosmological constant with relief, declaring that its invention had been "my greatest blunder." He was talking about his failure to trust his elegant equations in the first place — but it's also true that Einstein would probably have bagged himself another Nobel for predicting the expanding universe.

The idea of a cosmological constant didn't go away entirely. "It was something theorists would pull out in desperation," says Riess, "when they couldn't make the age of the universe come out right." As University of Chicago astrophysicist Michael Turner once put it: "The cosmological constant is an idea that's come and gone ... and come ... and gone." (Read about dark matter and how galaxies are born.)

But the accelerating universe brought the idea of some kind of such invisible force back with a vengeance. Even so, the Nobel committee took its time, and despite what Riess's friends say, he thinks the lag was perfectly justified. Even though the odds were against both teams being wrong somehow, it was impossible to rule that double error out either. Maybe supernovas were different in the past, for example, which made it look like the universe was accelerating. It was important for other groups to confirm the acceleration using different techniques. One particularly strong clue that Riess and the others were right: the Hubble Space Telescope showed that the universe actually did slow down early on, then sped up as the dark energy kicked in. With enough confirmations in hand, everyone could finally relax.

Everyone, that is, except the theorists. Just because dark energy is the leading explanation for the accelerating universe, it doesn't mean anyone actually understands what it is. Asked whether he thinks scientists are any closer to figuring that out, Riess answers bluntly, "I do not." But, he adds, "They're getting more creative about it, and maybe that will be the key." If they finally do crack the mystery, another Nobel is pretty much guaranteed.

See photos of the universe, to scale.

See photos of the Hubble telescope's greatest hits.

Physics Nobel: Why Einstein Was Wrong About Being Wrong

The research that leads to a Nobel Prize in physics can sometimes be a little obscure. In 1990, for example, three scientists got the nod "for their pioneering investigations concerning deep inelastic scattering of electrons on protons and bound neutrons." Got that? The next year, the prize went to a scientist "for discovering that methods developed for studying order phenomena in simple systems can be generalized to more complex forms of matter."

But sometimes, you just can't help saying, "Wow!" and maybe: "What took the Nobel folks so long?" That's what Adam Riess's friends kept asking him — and this morning at 5:30 a.m. the phone finally rang. "I knew that was the famous time," says the Space Telescope Science Institute astronomer. "The voice sounded Swedish, and I was pretty sure it wasn't Ikea." Sure enough, Riess and two other astrophysicists had just been awarded the 2011 Nobel Prize for the astonishing discovery a little over a decade ago that the universe is expanding faster and faster as time goes on. The most likely reason: a mysterious cosmic force known as dark energy. (See photos chronicling the life of Albert Einstein.)

Riess and his collaborator Brian Schmidt, of the Australian National University, had no intention of discovering dark anything when they launched the High-z Supernova Search in the mid-1990s. Neither did Saul Perlmutter, of the Lawrence Berkeley Laboratory, when he and his colleagues started the competing Supernova Cosmology Project. Both teams knew the universe has been expanding ever since the Big Bang. The question they wanted to answer: Is the gravity of 100 billion galaxies, all pulling on each other, slowing the expansion down? And if so, by how much?

To get the answer, the scientists looked to supernovas — exploding stars so bright they can be seen all the way across the universe. The farthest of these cosmic bombs detonated when the universe was still young. It's taken billions of years for their light to reach us, so that light is a snapshot of what the expansion looked like back then. The closer ones are a snapshot of more recent conditions. Once the astronomers found them, they clocked the supernovas' speed — and thus, the expansion speed of the universe at different eras — by measuring subtle features in the wavelength of their light.

What they found, to their astonishment, was that the universe wasn't slowing down at all. It was speeding up. "We spent at least a year struggling to understand what we were seeing," Perlmutter told TIME. In the end, improbable as it seemed, both teams concluded independently that there must be some unseen, unknown force pushing the cosmos apart. Their joint discovery was named "Breakthrough of the Year" for 1998 in the journal Science. (Read to see if Einstein was right about dark energy.)

What's even crazier is that just such a force was predicted, nearly a century ago, by Albert Einstein himself. When he put together the equations of general relativity back in 1916, Einstein applied them to the universe as a whole. To his consternation, they predicted that if the universe wasn't expanding, it should be collapsing. It seemed obvious that it wasn't expanding — but since it wasn't collapsing either, something must be propping it up. Einstein called the something the the "cosmological constant" and added it to his theory with some distaste, because the work had been so mathematically beautiful without it.

Then, a decade or so later, Edwin Hubble discovered that the universe is expanding after all. Einstein abandoned the cosmological constant with relief, declaring that its invention had been "my greatest blunder." He was talking about his failure to trust his elegant equations in the first place — but it's also true that Einstein would probably have bagged himself another Nobel for predicting the expanding universe.

The idea of a cosmological constant didn't go away entirely. "It was something theorists would pull out in desperation," says Riess, "when they couldn't make the age of the universe come out right." As University of Chicago astrophysicist Michael Turner once put it: "The cosmological constant is an idea that's come and gone ... and come ... and gone ..." (Read about dark matter and how galaxies are born.)

But the accelerating universe brought the idea of some kind of such invisible force back with a vengeance. Even so, the Nobel committee took its time, and despite what Riess's friends say, he thinks the lag was perfectly justified. Even though the odds were against both teams being wrong somehow, it was impossible to rule that double error out either. Maybe supernovas were different in the past, for example, which made it look like the universe was accelerating. It was important for other groups to confirm the acceleration using different techniques. One particularly strong clue that Riess and the others were right: the Hubble Space Telescope showed that the universe actually did slow down early on, then sped up as the dark energy kicked in. With enough confirmations in hand, everyone could finally relax.

Everyone, that is, except the theorists. Just because dark energy is the leading explanation for the accelerating universe, it doesn't mean anyone actually understands what it is. Asked whether he thinks scientists are any closer to figuring that out, Riess answers bluntly, "I do not." But, he adds, "They're getting more creative about it, and maybe that will be the key." If they finally do crack the mystery, another Nobel is pretty much guaranteed.

See photos of the universe, to scale.

See photos of the Hubble Telescope's greatest hits.