Are Loyal Customers Less Price Sensitive?

Let us start with seed questions on loyalty:

  1. Are loyal customers more likely to be less price sensitive and hence more profitable?
  2. Can a marketer maintain price premiums with loyal customers?
  3. Does customer loyalty drive long term profitability?

To some the questions will come as a surprise because the answers to them are self evident. But leaving out intuitions, is the causation relationship that loyalty means price tolerance and consequently higher profitability supported in the data? A few studies suggest this causation relationship based on correlation ( see here).

There is one other popular book, The Loyalty Effect, that states, “Companies can boost profitability by 75% by increasing loyalty by 5%”. But that is not based on research. The author makes that statement based on his example that reducing customer churn from 10% to 5% for a business with 90% customer loyalty doubles customer lifetime  (that is correct) and hence the profitability increases by 100% (tautology). However, his model and numbers are not correct  because he confuses two different percentages (see here for explanation).

Let me raise questions on what seems like a self-evident truth:

  1. Yes there is correlation but does that imply causation?
  2. Is there a hidden variable that drives loyalty and profitability?
  3. Is there Omitted Variable bias – that is there exists another variable that drives loyalty?
  4. What if price tolerance (and profitability) instead of being caused by loyalty is actually the driver of loyalty? In other words, is it possible that sensing price tolerance and high profitability of certain parts of their customer base, businesses may be doing everything they can to keep them (i.e., increase their loyalty).

I do not have data to prove these three possibilities but I raise here questions you as a decision maker must ask before accepting any claims of the need for driving customer loyalty.

6 thoughts on “Are Loyal Customers Less Price Sensitive?

  1. Rags,
    to build on your comments about the need for driving customer loyalty, here are a few nuggets of science from marketing research.
    According to Erhenberg what we perceive as loyalty is linked to market share and cannot be influenced but by changing the market share as well:
    ““Double Jeopardy” We were recently reminded of a statistical phenomenon in marketing called “double jeopardy.” With few exceptions, measures of brand loyalty (behavioral or attitudinal) are lower among buyers of small-share brands than among buyers of large-share brands. Ehrenberg and Goodhardt explain this nicely in the Spring issue of Marketing Research magazine. The phenomenon has mathematical reasons. A clear implication is that smallbrand managers should not be punished for lower loyalty ratings, or expected to build loyalty without the resources to build share as well.”
    http://www.action-research.com/newsletter/aline_may02.pdf

    In the same theory as well you can see that the brands having the highest measured “loyalty” are brands that have their shares shrinking quickly since no new customer tries the brand, all the ones you see have bought in the past and thus are 100% loyal

    In conclusion, loyalty is not a measure of the brand performances but just and artefact of the market dynamic. In my point of view that also challenges any meaning of the lower sensitivity for loyal customers.

    hope this helps
    Anne

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