Scholarly Insights: AMA’s digest of the latest findings from marketing’s top researchers
What are you willing to pay for loyalty? Most companies offer discounts to regular patrons, enticing customers to return for lower prices. If all goes as planned, one-time shoppers convert to loyal customers, enjoying lower prices and also an added benefit most companies don’t consider: the leverage to negotiate. This leverage perpetuates heightened expectations for the company to cater to the loyal customer’s wants. As a result, companies with loyalty-building strategies must be weary of entering a complicated “loyalty-discount cycle.”
The ‘Loyalty-Discount’ Cycle: A Catch-22
According to a study from the Journal of Marketing, a loyalty-discount cycle occurs when “loyal customers receive deeper discounts that in turn increase customer loyalty, resulting in a downward spiral of a company’s price enforcement.” Put another way: Be careful what you wish for because while you may retain repeat customers, your pricing can be compromised.
Authors Jan Wieseke, Sascha Alavi and Johannes Habel find that loyal customers receive greater discounts in price negotiations for two reasons:
- Loyal customers expect a reward for their loyalty.
- Salespeople want to retain a loyal customer base.
Managers must thoroughly calculate this trade-off as if making a purchase. Ensuring that discounts pay off as investments is crucial to maintaining a fair company profit. This is especially true if your firm offers products or discounts in order to draw loyal customers rather than maintain them.
How to Maintain Loyalty/Price Equilibrium
When designing or revising a loyalty-building strategy, managers should consider the following:
- Loyal customers want to be rewarded but rewards don’t have to be discounts.Managers can be creative in developing rewards programs which do not undermine pricing strategies. For example, free gifts or excellent customer service work stand as effective gestures to drive customer loyalty.
- Familiarity between salespeople and loyal customers can increase discount loyalty cycles.Familiarity can serve a positive purpose since amiable relations between client and salesperson can highly benefit customer loyalty. But managers must know how to tactfully regulate these interactions. It is important that managers train salespeople to understand boundaries and implement them with consideration.
- High quality products and services provide less room for bargaining.Customers who are loyal to a brand known for its superiority come into the transaction expecting to pay more for excellence. All brands should strive to offer high quality products, but understanding how brand perception plays into loyalty can also put you one step ahead of bargain-seeking customers.
Jan Wieseke, Sascha Alavi, and Johannes Habel (2014) “Willing to Pay More, Eager to Pay Less: The Role of Customer Loyalty in Price Negotiations.” Journal of Marketing: November 2014, Vol. 78, No. 6, pp. 17-37.