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?