Have you ever been curious as to why your cell phone company will give a new customer a free phone while giving you, an existing customer, only the opportunity to buy the same thing for $99? Or, maybe you’ve noticed your cable provider will offer a prospect a cable, TV, and Internet bundle for $99/mo, while charging you $139/mo for the same services. From a marketing perspective, where’s the logic? The reality is that there is no logic to it, aside from the misguided belief that price is the major factor in consumer purchase intention.
The cause of the phenomenon can, in part, be traced to the fact that the companies that choose this promotional strategy are often working in an oligopoly environment (i.e. an industry dominated by several major conglomerates). The focus is on the competition, not the customer. Competitive analysis is OK, but when a firm’s promotional strategy is driven by a competitor’s strategy; and tit-for-tat pricing gimmicks are the response it’s a pretty indication that the company is not truly customer centric. Do you see leading brands like Harley Davidson or Apple employing this type of strategy? Of course not, because their marketing team knows it’s the surest way to ruin a brand and consumer goodwill.
Marketing researchers have shown us that as many as 60-90% (Grisaffe, 2001; Oliver, 1999) of satisfied customers will consider defecting to competing brands. Thus, it’s hard enough to keep an existing customer…the last thing marketers should be doing is make existing customers unsatisfied. Yet, companies are doing it daily. The emphasis should be, first and foremost, on turning existing customers into brand evangelist, much like those of Harley Davidson and Apple.
Instead of using pricing gimmicks executives should be dedicating promotional dollars to enhance loyalty, which is defined as “either an attitude or behavioral intent that leads to repurchase intention” (Kenney & Khanfar, 2009). The benefits of customer loyalty include word of-mouth advertising, increased purchase volume, lower relationship costs, and decreased price sensitivity (Cronin, Brady, & Hult, 2000; Venetis & Ghauri, 2004; Ang & Buttle, 2006). There is an old adage that it’s cheaper to keep an existing customer than attract a new one. Well, just to illustrate the power of loyalty consider this: A 5% increase in customer retention impacts profits from 25-85%, depending on the industry (Dawkins & Reichheld, 1990).
Ang, L. & Buttle, F. (2006). Customer retention management processes: A qualitative study. European Journal of Marketing, 40, 83–99.
Grisaffe, D. B. (2001). What your company should manage and measure besides just satisfaction. J. A. Edosom Wan (Ed.) In Customer satisfaction management frontiers (p. 42). Fairfax, VA: Quality University Press
Kenney, M.G & Khanfar (2009) Antecedents of Repurchase Intention: Propositions Towards Using Marketing Strategy to Mitigate the Attrition of Online Students Services Marketing Quarterly, 30:270–286, 2009
Oliver, R. L. (1999). Whence consumer loyalty? Journal of Marketing, 63, 33–44.
Cronin, J. J., Brady, M. K., & Hult, G. T. (2000). Assessing the effects of quality, value, and customer satisfaction on consumer behavioral intentions in service environments. Journal of Retailing, 76, 193–218.
Venetis, K. A. & Ghauri, P. N. (2004). Service quality and customer retention: Building long-term relationships. European Journal of Marketing, 38, 1577–1598.
Dawkins, P. & Reichheld, F. (1990). Customer retention as a competitive weapon. Directors & Boards, 14, 42–47.