Thursday, December 01, 2005

Punishing Customer Loyalty

David Sims writes on TMCnet that broadband companies are punishing loyal customers by giving discounts to new subscribers, instead of existing subscribers. This article highlights two hidden common elements that affect loyalty: Entitlement and Comparison.

When a company transacts with a customer, there is an exchange of value. One delivers a service and the other provides monetary compensation for that service (or good). This is the free market. These parties willfully exchanged their value for the other's value. As Martha would say, "It's a good thing!" Yet, ever-increasingly, customers believe that over time, they are entitled to improved performance (without an additional exchange of value). They want more and more for less and less.

The second element is comparison. As consumers, we are always comparing what we have with others. Watch kids at a school cafeteria when they open up their lunch boxes. Each one looks at what the other got to see how their lunch compares. Customers are no different. They want to know if they got a good deal. It is human nature to want to feel like we are treated fairly. This has become an issue for airlines. For the longest time, consumers thought everyone paid the same price for the same plane ride. Once airlines moved to yield management-driven pricing where prices are optimized and vary widely, customers become quite irate. It also applies to this example David gives about broadband customers. They are (or should be) happy with the price they are paying for the service they are getting. Yet, when they see a solicitation for new customers that offers a lower price then they paid (or can pay), they become angry and resentful. They recognize clearly they are less valued by their supplier. In return, they value the supplier less.

The lesson here is customers inherently feel entitled to decrease how much they value their supplier by expecting more for less and hypocritically become upset when suppliers decrease how much they value that customer when they offer better prices to new customers.

What's a smart company to do?

Aside from buying The Paradox of Excellence in bulk and hiring Fresh Perspectives (always good ideas), executives must recognize money
is a proxy for value. If you want customers to give you more money, they have to value you more highly. You must shape the comparisons customers make so they see the value you already provide and avoid marketing actions that cause negative comparions. Moreover, by highlighting your great performance in context over time, you can begin to eliminate the customer's sense of entitlement.

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