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Loyalty and Price Elasticity

In recent marketing history the belief was formed that rewards increase customer retention. Up to what point is the value of the reward negated by a price increase? Forget rewards – with any price increase, what is the melting point of intrinsic loyalty?

Questions:

Hypothesis: Wal-Mart unilaterally increases its pricing by 15%. Could the Wal-Mart brand handle a 15% bump in prices?

Fact: gasoline goes up universally 50% and is absorbed. At 100% it starts to topple one of the world’s biggest companies. What do you do next?

Experience: your insurance company surcharges you on your dental plan because your dentist increased his fees outside the range of their policy limits. Do you swallow the difference or find a cheaper dentist?

Air Miles Rewards offers to double its rewards on select brand name products. Do you buy them or go for the store brand at the lower price?

Your hair-stylist: on whom you depend doubles his/her fees. To what extent is that reflection in the mirror worth the increase?

The answer to all of these questions depends greatly on to what extent price was a factor in the original decision. In the blog entry “Price, Shmice!”, I posited that Price is an indicator of value, but marketers should evaluate the decision criteria that precede it before they start messing with their prices, and presented the following as predetermining factors ahead of price valuation:

Achievement: how well will this decision help me to achieve my goals? Convenience: how easy is it to engage or acquire this product or service? Comfort: can I use this product or service easily or with peace of mind? Esteem: how will I be respected for this decision (by self or others)? Pleasure: how will I derive pleasure from the outcome of this decision? Trust: how can I trust that all my expectations will be met?

Answers:

Wal-Mart could not handle a unilateral 15% increase across the board because the trust that it has built up with its customers is based completely on price-point. Wal-Mart doesn’t cheat like some other discount retailers. All its products meet its discount values standards and any departure would breach the trust of its customer relationship.

Gasoline is oligopolistic. Come one price increase come all. But there’s no love lost. If you were to put your pump price up $0.001 cent above the gas shack down the street, watch and wave your kishkas goodbye, as no self-respecting driver will want to be seen in your station. There is zero loyalty now in the gas station business and I am bona fide PetroPoints customer. 2 years ago I would have given them a penny premium. Not any more.

Your choice of dentist has nothing to do with price. Trust, convenience and comfort are important values in play here. The surcharge on your insurance will only affect you if it brings economic hardship. You would sooner look for a better insurance plan.

Air Miles: doubt it. Most consumers put off future gain in favour of immediate gratification. That’s why personal savings are at an all-time low, credit card debt is an all-time high and most people fail to keep to their diet. If you are pre-disposed to buy the branded product and the rewards come gratis, you should buy in bulk while the promotion lasts, giving the branded product a false sense of accomplishment and the likelihood of repeating the mistake when sales falter over the next 3 months.

Hair-Stylist: offer to sweep the floor for them, or spread the visits out by a week or two. If it costs $300.00 for you to have your hair done with highlights and the whole bit you will see the increase as more reflective of the true value of you than the stylist. Esteem, achievement, pleasure, trust, comfort all come with a successful trip to the personal image reinvention store.

The customer-centric marketer will seek to constantly over-deliver value relative to the price. This is insulation against price increase, as the increase will then only reflect true commercial value. It is the quintessential value-add. As the price increases the customer-centric marketer will create more value-add offsets to the price escalation. Most marketers don’t put the customer at the center and when the prices increase there is no elasticity. Loyalty rewards are an artificial stimulant to fabricate a customer retention framework but they don’t offset price increases.

I am not an opponent of rewards. I simply don’t regard them as effective incentives for loyalty. As long as they don’t cost anything I will enjoy them. But increase the cost and bye-bye. I reward customers because I believe that they deserve them, not because the reward will keep them loyal. The customer-centric marketer will match price elasticity with values for long-term customer retention. That is what is meant by “Customer-centric marketing increases loyalty, frequency and continuity.”

 

 

Written By |Marketing Strategy|Comments Off on Loyalty and Price Elasticity

Jon Sherrington

Owner, Strategist, Writer – Hydrogen Creative Inc.

May 1996 – Present

My role is to provide strategic marketing guidance to clients to ensure their objectives are attainable, remain in focus and the communications solutions work.

My expertise is in how to realign goals-oriented brands, products, services or businesses to customer values to build loyalty, frequency and continuity.