Monday, January 25, 2010

Do Loyal Customers Pay More?

This is a continuation of the research by Werner Reinartz and V. Kumar where they dispel some of the claims usually attributed to the actions of loyal customers. Recall that they surveyed approximately 16,000 customers from four different companies. To get more detail, check with the two previous blogs.

The second claim they refute is that loyal customers are willing to pay higher prices because the cost of switching to another supplier is too expensive and therefore they are willing to pay higher prices. I will add some personal experience to this claim. When I last worked in industry serving as Director of Planning for a large multi-division corporation, we had customers who asked us to increase our prices so they could justify replacing equipment sooner. While my example does not directly support the claims of Reinartz and Kumar, it does point out that companies do not always seek the lowest prices for various reasons.

The evidence from their surveys indicated that long-term customers paid lower prices than newer customers. There prices were between 5 and 7% lower depending on the product. They found no evidence that loyal customers paid higher prices in the consumer business. In the mail-order business, the loyal customers paid 9% less than recent customers for one product category. At the French grocery chain there was no significant difference in the prices in any category for loyal customers. At the brokerage house all customers were charged the same fee.

The conclusion of the researchers as a result of their surveys was that a loyal customer is actually more price sensitive than the occasional customer. The researchers also suggest that loyal customers may strongly resent companies that try to profit from their loyalty. The survey results seem to suggest that consumers at all levels believe that loyal customers deserve lower prices.

As the Internet continues to influence the marketplace, it is becoming more and more obvious that companies cannot get away with price differentiation between customer groups for long.

The bottom line is that all evidence shows that loyal customers expect lower prices and generally get it. The cost of switching suppliers is no longer a factor in the equation of pricing.

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