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Comment by zentiggr | Hacker News Reader

I've imagined a company (cable phone or some other long term service) that signs everyone up at their full rate, and for every month you stay with them, they add 1% discount till after 50 months you are at 50% of full rate and stay that way. No coupons, no special just for you! offers, just an honest straightforward "we need to collect money to keep things running, but we value our loyal customers most".

Fantasy I know.

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Fantasy indeed... most consumers will prefer the offering of 40% off for the first year instead. Which can even be rational since there will frequently be another company offering a similar discount for switching to them the next year (ignoring intangible switching costs, of course).

The trouble is when some eager MBA comes along and sees a bunch of customers paying below market rates, so decides to shutter the program and bump payments up for the loyal customers.

Actually Canvas by Ford (month to month car rental) does this, but yes it's rare

Not anymore, they have changed their pricing model recently.

In the case of car rentals that seems like less of a loyalty program and more of an attempt at reflecting the fact that the thing you're paying for is getting less valuable over time.

AAA insurance's pricing model gives long-term customers discounts that increase over time

Car insurance is required by law and home insurance by many mortgages, so for those types of insurance, initial rates for a given coverage level should be uniform since demand and supply are understood quantities. Instead, they market policies on ancillary benefits, like roadside assistance, home warranties, etc.

Discounts for long term and importantly, low risk customers, are a way of securing future revenue by disincentivizing customers from shopping for lower rates elsewhere.

I've actually had AAA for my car insurance for a dozen years. Only had very small price increases during that time. No accidents, no tickets and yet they just increased my rate 25%. Been happy with them but if they think that I don't pay attention to the price I'm paying they'll learn.

So, they'll lose their 5% margin on you.

If your odds of noticing the bump, and caring enough to drop them were <80%, they still made money.

Why would you leave money on the table? The longer a customer has been with you the more inertia there is to switching. If you incremented by a small amount every month, most of them wouldn't care.

For that to happen the full rate at signup would be higher to accommodate the later discounts. That would drive customers away, so this probably wouldn't happen.

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