The sale and marketing of the add-on product, also known as upselling or loading, is a commonplace feature in many businesses eager to capitalise on a customer that is already engaged. But faced with multiple options at point of sale, consumers can make bad decisions as they can lack the ability to effectively and quickly analyse the relative merits of every aspect of a purchase.
Typical examples of add-on sales are the extended warranties offered by sellers of appliances or electronics. Car dealerships are another generator of substantial add-on sales that make a significant contribution to the top and bottom line. The proliferation of add-on products in a range of industries has meant regulators are now using behavioural economics to analyse the practice and offer up potential remedies for consumers – increasing regulation for brand owners. It is worth noting that regulators are highly aware of the issues surrounding add-on products and ASIC has conducted inquiries into both insurers, lenders and car dealerships.
The latest inquiries resulted in ASIC calling on insurers to significantly improve consumer outcomes as it found that many consumers are being sold add-on insurance products that are expensive and provide poor value. Many consumers find sales processes confusing and some can feel pressured to buy products they don’t understand.
ASIC’s report, The sale of life insurance through car dealers: Taking consumers for a ride, found that life insurance sold through car dealers is often substantially more expensive than comparable life insurance products, provides very low claim payouts relative to premiums, and is sold by car dealers who are paid high commission by insurers on sales.
The research found that:
- consumers can pay up to 18 times more for life insurance purchased through a car dealer, compared to similar term life insurance which provides more cover;
- consumers purchasing a car for their small business could be charged up to 80% more to get exactly the same life insurance cover as a consumer with a personal car loan;
- life insurance sold through car dealers is priced as an expensive single upfront premium for a multi-year insurance policy. The upfront premium is usually added to the car loan, so consumers pay interest on top of the premium, which can substantially increase the cost of the product. Furthermore, they can lose out when they repay their car loan early;
- one in ten policies was sold to consumers aged 18 to 21, who are unlikely to need life insurance; and
- there is a low level of awareness of the add-on insurance product and its features.
Simultaneously, ASIC also released its report Buying add-on insurance in car yards: Why it can be hard to say no, which analysed qualitative research on the experience of consumers who are sold add-on insurance by car dealers.
This research found that many consumers who purchased add-on insurance products:
- had no awareness of add-ons, including their value, before entering the car yard;
- had already invested large amounts of time, energy and mental effort in buying the car and so, by the time they were offered the add-ons, found it hard to say no to the offer of add-on insurance;
- said that they valued the insurance for providing peace of mind, but few could recall which products they had purchased, how much they cost and what they were actually covered for; and
- some consumers who did remember what they had bought, regretted their decisions.
Regulators appear to have the view that the more obstacles in the process of making a buying decision, the better the quality of the decision and the less opportunity for miss-selling and overselling. However the impact for brand owners is greater restriction on the way in which they can promote or offer their products.
The AANA encourages its members to follow good practice principles in advertising and marketing communications ensuring they are prepared with a sense of obligation to the consumer. Selling an add-on product is a legitimate sales method but brands need to create a set of consumer values and in doing so, aligning what is good for the customer with what is good for the company.
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You can find more information about the AANA codes of conduct for advertising along with an overview of advertising regulation here https://aana.com.au/advertising-regulatory-guide/