When it comes to retaining customers and preventing churn, gaining customer loyalty seems like a no brainer: it helps ensure repeat business and positive word of mouth.
But an intriguing new study by Professor Wieseke and colleagues examining the effect of customer loyalty on price negotiations explains the disadvantages of customer loyalty – and what you can do about it.
The loyalty-discount cycle
In a series of studies, Wieseke and colleagues found evidence of a loyalty–discount cycle. While customer loyalty decreases price sensitivity, this decrease doesn’t prevent these loyal customers from negotiating and receiving lower prices.
What’s driving this loyalty-discount cycle? For salespeople, they reward customer loyalty with a bigger discount because of their motivation to retain these loyal customers. For customers, they feel they have more power during negotiations and they expect their continued loyalty to be rewarded by a larger discount.
These researchers found that customer loyalty is based on either a product’s price or its quality, but customers whose loyalty is based on quality are less likely to bargain over price and thus, receive smaller discounts.
How to prevent loyalty-based discounting
- Customers want to be rewarded for their loyalty. Companies can fulfill this need using an alternative to a discount such as special treatment (e.g., faster service) or offering something for which the value to the customer is greater than the costs for the company (e.g., a free feature).
- Research suggests customers who are loyal because of superior quality are less motivated to bargain over price. You can take advantage of this by emphasizing the superior quality of your product or service and working to establish a high end brand image. Of course, it helps if your product or service is actually of high quality.
- The results found that the loyalty–discount cycle is stronger the longer the salesperson and a loyal customer have known each other. A potential solution is to get a different salesperson to work on the price negotiations, but only if that makes sense in your sales process.
Research has found that customer loyalty is a double-edged sword: on one hand, customer loyalty leads to discounting which negatively affects profit margins. On the other hand, discounts increase customer loyalty and lead to repeat revenue. Sales leadership have to decide how much they’re willing to “pay” customers for this loyalty.
Read our COO’s advice on successful discounting here.
How do you reward customer loyalty at your company? Let me know in the comments.
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