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Pricing and Customer Loyalty Are a Dangerous Mix

While success stories are certainly instructive, we can often learn a lot more from averted disasters. Take this near miss, for example…

A group of middle managers at a regional distributor got together to discuss some recent customer defections. Given the topic of the meeting, three quarters of the attendees were salespeople. After reiterating the problem—i.e. a couple of the most valuable customers had defected to competitors—the discussion then turned to potential solutions.

Quite predictably, the unanimous consensus among the salespeople was that pricing was the only reason customers like these would defect. They then went further to suggest that pricing for all of the company’s best customers was far too high and that if corrective action wasn’t taken in short order, all of them would be lost. One of the more vocal sales managers summed up the consensus view like this:

“Our pricing strategy for these customers is all wrong! Our most valuable and loyal customers should always being getting our lowest prices! That’s just common sense!”

And to most of the people in attendance, it did indeed make perfect sense. In fact, the meeting ended with most everyone in agreement that the company’s pricing should be realigned so that the most valuable customers would always receive the lowest prices by default.

Thankfully, this company had a built-in “pause” button…named Steven.

Steven was a data wonk. As such, he was always suspicious of consensus opinions, knee-jerk conclusions, and so-called “common sense.” So before any of these sweeping price changes could actually be implemented in the systems, Steven projected what would happen to the income statement moving forward if all of the most valuable customers began receiving the lowest prices.

As many readers will no doubt suspect, the results were not pretty. After all, these customers were so valuable in the first place largely due to the fact that they weren’t paying the lowest prices. By giving these customers the lowest prices as some kind of reward for their loyalty, the company would certainly retain their business…while losing almost all of their profit contribution.

As Steven bluntly described it when delivering his analysis, “Sure, we can do this. But we’ll be turning out the lights in roughly eight months as a result.”

Going back to the drawing board, the team eventually determined that for these customers, the recipe for loyalty involved competitive prices (not the lowest prices) plus fast delivery and priority technical support.

The moral to the story is that mixing pricing and customer loyalty is really hard to get right. And you do have to get it just right to avoid potentially disastrous unintended consequences. That’s why we always suggest first looking toward other “loyalty drivers” like dedicated service, priority support, return privileges, and so on, before even considering using your pricing as a loyalty program.

The last thing you want is a loyalty program that puts you out of business.

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