Chasing Loyalty at All Cost

[tweetmeme source=”pricingright”] When customers are not willing to buy branded products at premium prices, should the marketers  go after those customers with price cuts, discounts and promotions? Heinz, facing drop in sales and change in customer buying behavior, said it is doing exactly that:

Heinz warned analysts that it will likely have to lean heavily on promotions, discounts and advertising to stop the defection of consumers to cheaper, private-label brands. “This is a tough environment, there’s no doubt about it,” said Art Winkleblack, Heinz’s chief financial officer.

It is a surprise that Heinz that  reported increase in profits for the past four quarters is reverting to the conventional wisdom of maintaining loyalty. The expectation for any marketer holding on to customers through enticements is that:

  1. These will stay loyal when the price eventually improves . But, data shows that buying loyalty leads to profit destruction in the long run.
  2. Loyal customers are less price sensitive, based on a study which is a contradiction since marketers first have to buy loyalty with price cuts. There is no proof in the data that loyalty leads to price insensitivity.

In their 2002 book, Trading-Up, authors Silverstein and Fiske, talk about a behavioral shift in consumers – seeking New Luxury and willing to treat themselves to premium priced products. These are the customers who bought emotionally and justified rationally. Marketers chased these new breed of customers with price points that were high but attractive enough to this Trading-Up segment. (Note: If not for this segment, the prices would have been even higher. )When marketers got used to the volume and market share, they built capacity and made projections based on continued growth in the Trading-Up segment. But all that changed when the economy took a turn for the worse.

In the early days of the Great Recession, The Times profiled how customer’s buying behaviors started to change – from buying premium priced name brand food items to cheaper store brand items. A woman profiled in the story said she convinced her brand conscious husband he was getting A1 steak sauce by refilling empty A1 sauce bottles with store brand sauce.

Recession came as a shock, people losing jobs, seeing their friends and families lose their jobs and a fear for their own caused some to cut back on what used to be essentials. Economists call this the income effect. What the recession started was not just a blip but a behavior change that led  many customers to permanently trade down to cheaper private labels. Arguably these are the “Trading-Up” customers who sought New Luxury.

Instead of trying to hold on to these price sensitive customers  and buying their loyalty at all costs, marketers  must treat this as an opportunity to identify their truly brand loyal and price insensitive customers. When the price sensitive customers all take one step back, those who are left in the front row must be the brand loyal ones. Which means instead of discounting or dropping prices, marketers can actually  increase prices (See Starbucks case study).

What is your cost of loyalty?