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.