Firms can take advantage of having locked-in customers through multi-period pricing. This occurs when the initial price is low (to attract customers) and then the price is raised once the customers are locked in. Multi-period pricing only increases profits if the customer is locked in - if the customer is free to move to other providers, then when the price is increased they are likely to do so. There are lots of examples of multi-period pricing - one of my favourites is that it is a good explanation for why drug dealers give away free samples of their highest-quality (and most addictive) product.
So, it was interesting to read this article in the New Zealand Herald last week, about the strategy employed by Trustpower:
Trustpower has been hauled through the courts and fined $390,000 for misleading consumers over a campaign for an unlimited broadband deal.
Between March and July last year, Trustpower promoted a $49 a month for 12 months unlimited data broadband plan, under the campaign theme: "Good things happen when power and broadband get together." ...
However, the $49 price was available only to customers who signed up for power and broadband at the same address on a 24-month contract term.
For the last 12 months on the contract the cost jumped to $79 a month and if a customer wished to cancel the contract at any time during the 24-month period they would incur exit fees.
This is a classic example of multi-period pricing, supported by locking customers into a contract through the use of a high termination fee. It is worth noting that the Commerce Commission took issue not with the multi-period pricing strategy itself, but with the way it was marketed - the increased price over the second 12 months of the 24-month contract was buried in the fine print of the advertisements for the deal. If Trustpower had been more up-front about the terms of the deal, it wouldn't have attracted the Commission's attention (but it might not have attracted as many consumers' attention either!).