Familiarity Breeds Price Sensitivity

One of the commonly cited business value from loyalty is that, loyal customers are less price sensitive. How true is that claim? Previously I raised questions about one such study. Now I have more data to state that it is exactly the opposite – loyal customers are actually price sensitive. The key to this claim comes from Reference price – the price set in the minds of customers based on their past purchases.  Reference price is reinforced by frequency of purchases.

[tweetmeme source=”pricingright”]Customers who remember past prices because of frequent exposure are the most price and promotion sensitive because they continuously monitor the pricing environment –  Thomas and Menon,  Journal of Marketing Research 2006

For example, suppose you are a regular loyal customer at Chipotle, go there for lunch 2 times a week and always order their vegetarian burrito (the only one that includes guacamole for no extra cost):

  1. You may not know the exact price you pay but you will know when the price goes up
  2. If you had a coupon, you won’t hesitate to use it even though you love it
  3. If the product integrity changes, e.g., they stopped adding guacamole, you will notice it

Customers clearly see deviations from reference price and react to it:

  • Any price higher than the reference price may be seen as a rip-off
  • Any price lower than may be seen as a a deal. As a side effect frequent exposure to lower price due to discounting or promotions  lead to training the customers to this new low reference price
  • Reference price is the reason you see customer backlash when you charge for extras

So a loyal customer who purchases repeatedly becomes very familiar with price, value and alternatives and become product experts which makes them sensitive to price increases. Any price insensitivity is lost due to loyalty program discounts.

A customer level longitudinal study of mail order company and a French grocery chain, published in Harvard Business Review 2002[pdf], states

Regulars consistently paid less due to discounting many received from loyalty cards

This flies in the face of the claim that loyalty allows a marketer to charge price premium. Even in the absence of the studies I quoted you can see the contradiction – if a customer is spending consistently and repeatedly on your product, will they demand lower price or accept higher price than less frequent buyers?

What are you charging your most loyal customers?

3 thoughts on “Familiarity Breeds Price Sensitivity

  1. Remi
    First, I see you are from Haas, me too. Go Bears!

    You make very good points, let me address them.
    The data sources are from peer reviewed works (the HBR article is based on a previous work in Journal of Marketing)
    I am producing evidence against a very generalized and commonly accepted claim that loyalty induces price insensitivity. Until these studies I quoted no one has done a customer level longitudinal study (as opposed to easier and not reliable firm-level cross-sectional studies). You raise the same concern about my claim – the net businesses cannot blindly accept loyalty leads to higher prices without evidence and testing for their case.

    In terms of relation between product type and loyalty – you are correct again that a relation might exist but no data to prove causation claim.

    Even in the absence of cheaper alternatives, loyal customers won’t accept that they pay more than newer or one-off customers.

    For luxury goods and other hedonistic consumptions the most resource rich with high willingness to pay matched with high wherewithal to pay are least price sensitive to start with. In fact econometric studies show these customers treat price as quality and status and will consider cheaper alternatives as not so good. As I wrote in one of my posts, “pricing for Richistan is like pushing on an open door – no pressure”.

    I do not understand the relevance of creative packaging to this case, bundling and versioning to this case. However I do agree these are methods to improve profits – I have practiced the same and have written extensively about all three in my blog.

    Thanks for participating, I appreciate it.


  2. I think you need to look at the relationship between product types and loyalty. If there are no cheaper substitutes, I believe the loyal customer will be willing to pay more. Type of products associated with that behavior: gasoline and other necessities, fashion items, addictive items such as specific coffee or chocolates, items that in general constitute a customer’s identity – tickets to see a show or a game with favorite players…
    For items with close substitutes the opposite is probably true as you point out. Pointing in that direction is the common practice of reducing weight in soups and sauces rather than increasing prices. Other typical strategies to increase profit per item are bundling and versioning. Chipotle could introduce a super vegetarian burrito with soy cheese and guacamole at higher price, downgrade their current version (w/o guacamole) and offer it for 10 cents less.


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