Otsikko

Otsikko

9 October 2013

Better prices to new customers ?

I thought I made a good deal, when I continued subscription of a trade magazine for the year ahead. The next day, however, I got an offer, which promised me as a potential new subscriber the same magazine with a price tens of percent cheaper. And this was not the first time - numerous times I have seen that I am valued less as a customer than those who are newcomers. Here we shall discuss this from business point of view. When should a company reward new customers, and what factors influence this?

When to reward or punish customers


Yale researchers Shin and Sidhir have examined in more detail, what kind of pricing strategy you should apply in your business - whether existing customers should be 'punished' with a higher price or less favourable terms than the new ones.

In the research, they found that from company point of view, it is essential to understand how concentrated is customer value and how flexible is customer shopping. Concentration of customer value varies greatly, in some areas (such as newspaper purchases or subscriptions) all customers have close to equal value (excluding value for advertisers), while in some businesses there is a significant difference in terms of money between good and ordinary customers (for example in private banking and air travelling). The easier and more convenient it is to change a merchant or product or service vendor, the higher shopping flexibility is.

On this basis, the researchers formulated guidelines for companies, shown in the attached picture. Only if the most valuable customers are buying a lot more than others, and if the product or merchant can be easily replaced, it is worth rewarding existing customers, i.e. to give them lower prices or better benefits than to new ones. The reasoning is that otherwise it is too easy for customers to select other solutions. And because the most valuable customers are the most profitable, it is best that the benefits are given only to them. In all other cases, it makes sense to attract new customers with better terms than the present customers get.

Business characteristics


The model above provides clear guidelines for companies, but when applying it, specific characteristics of the company business should carefully be taken into account. This section discusses some important factors that should be evaluated, when planning the approach.

Relationship Marketing


The key idea of ​​relationship marketing is to know customers, to deeply understand their needs and to appreciate customer relationship that has been created - this builds a competitive advantage for a company. In contrast, technology or gradual improvement of products are often seen as non-sustainable competitive advantages

Relationship marketing creates convenience, trustworthiness and other emotional ties, which build barriers for customers to change company or its products, thus reducing shopping flexibility. As presented above, this should make attracting new customers with better terms more lucrative. On the other hand, this observation is contradictory to normal customer experience: staying friends with a company that does not value me as a customer and gives newcomers better conditions, is seldom preferred.

The Internet and Social Media


The Internet gives consumers access to tremendous amount of product and service information, opinions and buying options, independently of time and place. This has a significant impact on company's customer strategy.

First of all, a large number of vendors and availability of supply facilitate re-orientation of purchases, i.e. shopping flexibility increases. Secondly, opinions and company reputation spread through the web and social media much wider and faster than in the past - and it is also well-known that negative opinions spread much wider than positive ones, so favouring new customers may make existing customers communicate bitter words. Internet content and new products, services and business models enabled by the web create alternative and new ways to satisfy consumer needs, which increases shopping flexibility - often indicating the fact that customers no longer buy the products or services they used to.

The Internet and social media provide companies also tools to enhance their customer strategy. The web can be used to actively communicate with customers, to create dialogue with them and to develop communities around company and its offerings. This increases customer loyalty and creates competitive barriers. Internet technologies can also be used to enhance basic product or service by developing extensions, boosting differentiation and exit barriers.

Globalisation


Globalisation works in conjunction with the Internet and changes consumer purchasing: there are more and more cross-border availability options for existing products and services.

Besides reducing differences in national consumption patterns, globalisation has also created global consumer tribes, which are emotionally connected by common values of consumption and which use consumption of certain products or services to create a community and to express their identity. If a tribe considers a product or service extremely important, shopping flexibility will be very low and shopping value may be much higher than average.

Digitalisation


Digitalisation has already revolutionised a number of industries, where transition from physical distribution to digital one has brought new business models and new leading players. The process is underway for example in newspaper and magazine publishing, where printed media is now being complemented and competed by digital products. In addition, there is a great threat of non-consumption, people switching their purchased media products over to ad-sponsored or even free digital content. This environment is a classic example of highly flexible shopping and very low concentration of customer value.

Digitalisation will also bring changes to other industries. Companies can use it to increase customer loyalty and to create valuable extensions for their offerings. For example, both online and offline retailers are using customer information to develop customised offerings that will increase customer engagement and sales.

Company cases


Finally, let´s look at two cases that highlight challenges and opportunities, when applying the learnings above.

Mobile Operators


Mobile operators are selling subscriptions and often mobile phones, together with subscriptions or separately. The value of customers for an operator varies quite a lot, and shopping flexibility is affected e.g. by type of customer contract, bundling models, means to increase competition such as number portability, as well as operator's own actions. In most countries there are three to four operators, and in addition, some countries have so called virtual operators.

Mobile phone use varies greatly, depending on user and use purpose, and operators offer various packages with different service content and prices. The most valuable customers may bring in more than ten times more revenues than standard customers. Prepaid subscription is the most flexible one: when services quota has been used, you can purchase more or take a competing offer. Prepaid customers are usually the least profitable ones. When a customer has a postpaid contract, the situation is very similar with the previous one, but subscription packages (either with or without a phone) create typically a commitment of three months to two years. During this period, a customer is very tightly tied to the chosen provider. Popularity of contract types varies greatly from country to country. For example, postpaid is dominating in the Nordic countries, while in Southern Europe and in developing countries prepaid is typically more popular.

Operators were long able to make subscription change very difficult, because of missing number portability. Gradually, however, widely spread number portability provisions have increased purchasing flexibility. In addition, operators have used their own, exclusive value added services as a means to retain customers. Success of strong, independent service brands also in mobile context has made these initiatives, however, a relatively small success.

Typical customer strategy of operators has thus been offering of more affordable packages to new customers. According to the theory above, making better than normal deals with new postpaid or prepaid customers is questionable - unless you know that they will be generating plenty of revenues in the future. So far, operators have not been innovative enough to build high enough customer exit barriers and to sufficiently reward their loyal customers.

Tiimari


Tiimari, a Finnish retail chain, has already been analysed in a previous post. Tiimari product categories are very widely available also in other offline and online stores. Because the company name is the most important brand asset, not its products, and because customers do not have any closer emotional ties with the company products, shopping flexibility is high. The largest purchases can be quite large compared to average ones.

Tiimari offers same deals for regular customers and new ones. Company products are clearly easily replaceable. If it is not possible to create exit barriers for customers, the company will either need to provide tangible benefits to their major clients, or more effectively hunt for new customers while existing customers´ buying behaviour is unpredictable.

5 comments:

  1. Raimo, extremely interesting material and viewpoint.
    I would discuss the issue especially in the eCommerce context, where many companies consider that the only way to build the market is by low pricing. It will be interesting to see,how / when they will reach profits - if ever.
    I propose that in many cases the customers have accepted the concept of bringing in new customers by means of lower prices - as long as the existing customers are as well rewarded genuinely - by other means than the price. However, most companies lack a concept for the latter one - in these days traditional loyalty programs are not enough.
    I would be interested to know, how many of the companies follow customer life time value - and how many test different offering approaches by calculating LTV instead of margin per order etc. The issue is, does the low price in the early phase of the relationship increase customer commitment and long-term sales.

    Hannu Mattinen

    ReplyDelete
    Replies
    1. Yes, when barriers to purchase from other sources are disappearing, whether their are availability of other shopping options or related to own convenience, we are basically in the world where ´close to all prodcuts´ are falling into try to retain existing customers AND try to acquire new ones category. And as you said, loyalty programs are not enough.

      In B2B businesses it is normal to think in termes of LTV, but in B2C it is still difficult to track, what is the value and correspondingly the effort of an individual customer.

      Delete
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