The conventional wisdom is a no-brainer: Since the investment is so high in obtaining new customer/client relationships, it makes perfect sense to do whatever one can to retain and enhance those relationships.
Unfortunately, it isn’t so easy. Especially in the “high-churn” industries, competitors often find easy pickings from competitor’s customers. In those cases, the costs of retaining relationships can skyrocket.
High-churn industries essentially offer the same products with price being the main point of differentiation. Good examples of these high-churn fields are cell phones and cable/satellite services.
The cell phone companies, which have become an oligopoly, often offer the same specific phones and virtually the same service at essentially the same prices. To attract customers they generally promise to buy-out consumers’ service contracts and give the customer a new phone and new service contract. Hence CHURN.
There is a little more regulation in the TV connection business. Here the community has designated a single cable source, but the competition really doesn’t include cable. Through technology Comcast (though Xfinity®) and ATT (through Uverse®) and others can offer a combination of TV and Internet services. The dish technology, which is somewhat passé, offers wide varieties of TV services but no Internet connectivity. Again, the battleground is the current user and the incentives to switch are money-oriented. Hence CHURN.
Airlines and Hotels
There are other fields – like airlines and hotels – where providers have invested heavily in customer loyalty programs. Here these programs are effective as long as the provider can fly to the right destination of the hotel company has a property there. When that is not the case, the customer seeks other choices and may be attracted into competitors’ customer loyalty programs.
Yet another challenge to the traditional customer loyalty program is the “Groupon” phenomenon. Here the brand- and product-loyal customer is given the opportunity to try a competitive product or service at a significantly lower price. The rationale: if the customer likes what he/she experiences with the Groupon product or service, the customer may shift loyalty to the Groupon product or service.
One would think with all these challenges and stimuli that the provider would be proactive in trying to maintain the relationship. However, some preliminary research published in a recent issue (June 11. 2015) of Knowledge at Wharton takes aim at the conventional wisdom.
Research Attacks Conventional Wisdom
The article is entitled “Why Offering Rewards to Stay Can Drive Customers Away.” It is based on an interview with Wharton School of Business (University of Pennsylvania) Prof. Raghuram Iynergar, one of a team of academics studying customer loyalty programs.
While the results are very preliminary, one factor seems to have emerged. Mass marketing campaigns to customers are dangerous. In one test, researchers sent one group of customers a special incentive to thank them for their loyalty. The control group was sent nothing. The results were a loss of 6% of the control customers and 10% of the test customers. This indicated a CHURN rate of 4% perhaps caused by the loyalty effort.
Among the findings of the study: stay away from mass marketed loyalty programs. If such programs are developed, make sure they are carefully targeted to specific market segments.
‘Better to Let Sleeping Dogs Lie’
According to the researcher: “ … In our case, In our case, what we found was that people who are consuming a lot, way above the number of minutes that they had, consumers who had a huge amount of variation, consumers who are negative trend over the time — that they were consuming less and less — those are the people who are likely to leave. And, for many of these customers, doing a retention campaign actually made them more likely to leave. Sometimes it is better to let sleeping dogs lie.”
Also discussed were pricing plans as used as an incentive to loyal customers:
“A lot of people have looked at pricing plans and how customers choose among pricing plans. Many of these things are self-selected by consumers. So, from a company’s perspective, if they want to look at the causal impact of what happens when they give pricing plans, it’s difficult to do so a priori, because there’s an aspect of consumer self-selection involved,” according to Prof. Iyengar.
Clearly, customer loyalty programs are a slippery slope, and marketers should consider them very carefully before implementing them.