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“They wake us up in the morning, they interrupt our dinner at night, they force the sick and elderly out of bed, they hound us until we want to rip the telephone right out of the wall.”

This is what US Senator Earnest Hollings said to US Congress while introducing Automated Telephone Consumer Protection Act, in 1991. Are we any better today after 16 years? Telemarketers, direct mailing companies and others want our attention to sell us range of products and services or to ‘help’ us change the suppliers of utilities to save £100s by ‘easy switching’ options!

The main reason for the increase in telephone and internet marketing directly to consumers is the cost of reaching the consumers directly has reduced drastically. This reduction is due to lower call charges, the reduced cost of call centres due to offshoring and the relative ease of obtaining personal details such as address and telephone numbers. The internal cost of all this to companies is quite low. But there are external costs to consumers and to society at large like wasted time, irritation, and in many cases entering into expensive contracts. This externality makes aggressive telemarketing cheaper for companies. Combine this with any unethical/illegal practices such as agents taking consumers for ride by telling lies compounds the problem.Here I try to make economic sense of this market behaviour and to suggest how the irritation caused to consumers might be reduced.

What can consumers do about this? Well one response would be to de-list their telephone number. Another would be to register with  an agency such as the Telephone Preference Service, that allows individuals to record their wish to opt out of receiving unsolicited telephone sales calls. This service is free to consumers. However, is there ever such a thing as a free lunch? Having studied economics for many years, I would say not! So who finances the Telephone Preference Service then? Well it is the Direct Marketing Industry, so in the end it is consumers that pay for this service.

What can regulators do? Ofcom for example can take action against companies mis-using electronic communication technologies that causes unnecessary annoyance, inconvenience or anxiety to consumers under Communications Act and Enterprise Act. However, the maximum penalty that Ofcom can impose is £50,000, which may not be enough of a deterrent.

Now consider an alternative view of the situation - and a possible solution - from Ian Ayres and Mathew Funk. Remember that external costs i.e., consumer time and irritation are not factored in the companies’ decision. So one way to ensure these costs are internalised by companies is to put price on consumer’s time (it may be difficult to put value on ‘irritation’). We all know about ‘caller pays the receiver’ numbers like 0845 or 090 numbers where the receiver’s account is credited with £1 or even more in the case of some services. Reverse this logic and combine it with the price put on private time. If then there were a regulation which said that all consumers willing to ‘listen’ or ‘entertain’ direct marketing calls need to be compensated by the calling company - say at £1 per minute - this will ensure that the costs of contacting potential consumers will be internalised by companies which will result in lowering of direct marketing calls as companies become more selective in who they call.

Find out more

• Join the discussion - are you plagued by cold callers?
• The psychology of deception - how can rational people fall for scams?
• The ethical marketeer - can a company market successfully - and honestly?
• The great phone swindle - the Money Programme discovers that telesales calls can rob us of more than just our time
• Marketing Privacy: A Solution for the Blight of Telemarketing - the paper that proposes the view mentioned above

About the author

Devendra Kodwani is Lecturer in Finance at the OU Business School. His research interests include the economic regulation of utilities and he has written several papers on privatisation and regulation.

Blogging about

Money Programme

Get the facts behind the big business and finance stories from around the world - and down your street.

It used to be the weather – but in recent years its house prices… the subject that seemingly everyone in Britain talks about. The rapid rise in prices since the housing market slump at the start of the 1990s has evoked endless debate. When will prices fall? What will trigger the fall? Will the current credit crunch and the demise of Northern Rock hasten an end to the boom in the housing market? Who will be most at risk if prices fall?

One group that is viewed as being exposed if interest rates continue rising and house prices fall, is the thousands who have bought property to let for rental income. The last decade has seen a burgeoning market in buy-to-let properties with mortgage advances on buy-to-lets growing from £2bn (on 28,700 advances) in 1998 to £108bn (on 938,500 advances) in 2007. Buy-to-let currently accounts for 8% of the mortgage market. These figures do not show the full extent of the buy-to-let market, given that many properties are bought without the use of a mortgage.

So, if you’re thinking of joining the buy-to-let boom, how can you minimise the risks involved? What homework do you need to do before you go hunting for your investment property?

Any investment opportunity should be explored with a financial appraisal, and buy-to-let is no different. You’ve got to look at the income you’re going to draw in, if you’re successful in renting the property out, and set that against the cost of borrowing the funds to acquire the property. Then you need to build in some cautious assumptions about your commitments in terms of things like taxation, repairs, and void periods (when you can’t find a tenant). Also, make some guesses about bad debts, because unless you’re letting through an agency which takes responsibility for chasing the renter, you’ve potentially got that 'financial shortfall' as well.

Now, it’s time to embark upon some stress testing. At the moment, your financial appraisal is based upon your best assessment of the financial facts which relate to the investment opportunity. However, a certain number of cash flows in this model have uncertainties associated with them. So you’re advised to do stress testing, which means applying more conservative or more adverse characteristics to those cash flows, and see if your investment is still viable.

A classic factor to stress test when you’re investigating a buy-to-let is the length of time you can let your property each year. Your best estimate may be that you’re going to let the property for ten months out of every twelve. If you’re in a university town that may be a fair assumption, given the length of the university year. But what happens if something goes wrong and you only actually manage to let it for eight months? Are you in financial trouble, or is the investment still viable?

You may build your case on the assumption that you have to pay £1,000 a year in terms of decoration. But what happens if your tenants cause a lot of problems, or something adverse, like dry rot, affects the property? Instead of it being a £1,000 repair and decoration bill each year, it becomes £10,000. Are you still okay financially? Stress testing now may save you much pain later on.

Lastly, make sure that you build in the cost of funds, even if you’re in the fortunate position of not having to borrow any money, because there’s an opportunity cost. If you put £150,000 into a property you forsake the opportunity to invest the money in, for example, a building society account and earn interest on it. So make sure you factor these foregone interest earnings into your financial appraisal

These financial calculations are the first step in the research which should precede the purchase of a buy-to-let property. There’s more work to be done, but they provide a great foundation to build upon.

Find out more

• Join the discussion - Is property safe as houses? Are we teetering on the edge of a housing market collapse?
• Video extras - see the bits that weren't broadcast
• Managing risk - How can managers protect themselves and their projects from risk?
• Buy-to-let no more - the Money Programme examines the fortunes of the buy-to-let market

The opinions expressed are those of the author and are not held by the Open University or BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

About the author

Martin Upton is lecturer in finance at the OU Business School. Previously he spent 20 years in treasury management, including 12 years as Treasurer of Nationwide Building Society. Martin's particular interests are financial services, the housing market, financial markets and risk management.