Monday, November 8

I (happily) let Rogers manipulate my incentives

I received an unsolicited call from Rogers on Saturday. I already have TV, phone and internet service from them, and they were offering me an additional 10% off each service. The only catch was that if I cancelled any of these services within two years, I would be charged a cancellation fee equal to the discount I received on that service, up to a maximum of $100.

At first, I was skeptical. Rogers already had me as a customer. I wasn't threatening to switch to a competitor. Why would they offer me a discount when I was presumably happy and willing to pay the price they were already charging me? I asked the salesman this question, and he gave me some textbook line that the discount is because I subscribe to multiple services.

The real answer, I think, is that it changes my incentives if I am later thinking of switching to a competitor: there is a cancellation fee that wasn't there before. Of course, I'm not made worse off by the fee, since the savings I receive from the discount will cover it (and technically, I could have been earning interest on the savings in the meantime, putting me a few cents ahead). But the cancellation fees change my incentives for switching to a competitor.

Let's say my services cost $100 per month. Without the discount, my cancellation decision would be:
  • stay with Rogers and keep paying $100 per month
  • ditch Rogers
    With the discount, my cancellation decision would be:
    • stay with Rogers and keep paying $90 per month
    • ditch Rogers and pay them $100
      I happily accepted Rogers' discount, since in the worst-case scenario, I'll be no worse off because I'll receive the discount and pay it all back when I cancel my services prematurely. In the best-case scenario, I'll save 10%. But these two options offer very different incentives when it comes to deciding whether to cancel or not. Staying with Rogers is now more attractive, since it's cheaper than before the discount. More significantly, ditching Rogers is now less attractive because of the cancellation fee.

      It seems like this could be a smart move on Rogers' part, since the loss of revenue from the discount might pay for itself in improved customer retention. If they were really smart, Rogers would be running an experiment to find out. They could randomly divide their customers into three groups: one receives the 10% off with a cancellation fee, a second receives 10% off but with no cancellation fee, and a third receives no offer whatsoever. Then, Rogers can track the cancellation rates of these different groups over time. My guess is that the 10%-plus-cancellation-fee group would have significantly better retention rates than the other two groups, but it would be interesting to test empirically.