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Price competition vs customer loyalty

By Helmar Rudolph

or “Drop that price and lose that slice (of the market)”

Long before the term CRM became “en vogue”, companies were trying to tie their customers to their business. They called it customer loyalty.

It meant that customers would engage in repeat purchases of products or services offered. The logic behind it is still the same: it is several magnitudes cheaper to service an existing customer than to acquire a new one.

As increasing and improving customer loyalty forms an integral part of any CRM-centric transformation process, one can expect significant sums being spent on achieving just that. There exist few published results of the impact of CRM projects on customer loyalty, but let us assume for a moment that this is what happens – least of all because it is one of the stated goals of CRM.

All would be well if not for one little weapon frequently used whenever reason runs out and desperation high: price competition. These days the market brims with competitive attacks, and one of the easiest ways to woo more customers and to keep existing ones from leaving is to reduce the price of the product.

It was Peppers/Rogers who in their first book “The One-to-One Future” remarked that part of any 1-1 marketing strategy should be a desensitisation to price by adding value to the product, engaging the customer in a learning process, thus making it more difficult to leave for another one. In other words, if you are sure about the loyalty of your customer, you should even be able to raise the price or at least make your product immune from price wars fought by the competition.

I’m sure we’re all aware that this doesn’t apply to all products or services, but what Peppers/Rogers meant was this: go beyond just selling your product, because if you strengthen the bond with the consumer, personal or emotional, they won’t be that sensitive to price competition.

However, I think they reasoned from a “perfect world” point of view, not taking into account historical background, socio-economic factors and the competitive arena in which products and services are marketed especially in South Africa.

The following questions arise:

* How far can your loyalty-directed efforts hold on before you have to give in and join the fray, particularly if you market a product that *only* stands on the brand – rather than a more tangible bond or deeper learning relationship? Examples: toothbrushes, beer, soft drinks, toilet paper, washing powder, etc.
*
Is it an either/or situation, where a drop in price ends an unconscious signal to the customer – assuming marginal perceived difference in the product – that it is really all about price rather than added value?
*
Aren’t – as a result – all loyalty related efforts getting thoroughly undermined by engaging in price competition?
*
In a country as economically unstable as South Africa (with all its implications), can we ever expect customers to be loyal if the next best offer is just lurking around the corner, and if no bond exists that would dissuade customers from switching brands?
*
Can we expect them to be loyal if they have been maltreated for decades with lousy service and overpriced products (see Telkom, banks, cars)? In other words, isn’t any move to keep the price at current levels greeted with more cynicism and comments about rip-off and exploitation?

Companies spend millions to build their brands, millions on CRM projects (that by and large fail, BTW), and then – BOOOM! – someone drops the price or offers something of a higher perceived benefit! What happens next? A large number of the same people they were trying to “glue” to their business simply leaves.

When money is tight, the brand should stand – but does it really? Hasn’t the local marketing community essentially destroyed the foundation that would lead the customer to becoming less price sensitive? Shouldn’t the money it spent on “branding” rather been spent on “bonding”?

It may be a Catch-22 that local companies find themselves in: in an increasingly competitive arena they can’t really keep the price at current levels unless they add tangible value to it, yet if they engage in price competition without a backup, they may never gain the customer’s confidence which would result in sustained loyalty.

Some things are clear: the customer is becoming increasingly aware of what they perceive as ‘real value’; they way products and services are marketed and branded will no longer suffice; white elephants and traditional exploiters like banks, cell phone providers and Telkom (to name but a few) will experience a mass exodus the moment someone offers better products at a more reasonable price and including a better service.

That said, two things may save them: government greed that essentially prevents a second network operator from making a significant impact, and the lethargy of the South African public not exercising their right to vote with their feet when given the opportunity.

In essence, I believe if you compete on price, you kill loyalty. If you want to foster loyalty, you’ll have to offer far more than just competitive pricing – and very few local companies currently do that. Add to that the factors mentioned above, and you can pretty much write off the idea that the customer will ever be loyal to you.

A possible remedy? Start removing the hypocrisy from your advertising, because this is what your loyalty efforts get measured against, especially in times of economic duress and rising consumer cynicism. Then try to see CRM not as a way to make more money, but as means offer better service. On that note, profitability also increases if your costs go down!

It is my belief that loyalty – just like its superset CRM – is something you will be rewarded with if you work on the periphery rather than directly aiming for it.

Proper CRM though mandates honesty and openness, and this certainly is a tough nut to swallow especially for the likes I mentioned above.

Loyalty increases when your attitude changes, not the price. If you compete on price alone, don’t even spend a cent on CRM or loyalty programs – it’ll be a total waste.

Helmar Rudolph heads Argo Navis Consulting, which helps companies succeed with their CRM-related business transformation process. Contact him on +27 21 794-3414, or via e-mail on mailto:helmar@argo-navis.com

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The Big Change is a business strategy blog and newsletter published by Arthur Goldstuck, managing director of World Wide Worx, a leading technology research organisation based in Johannesburg, South Africa.

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