The Price of Loyalty

In 2010, Seth Godin published a thought-provoking blog on pricing: his position is that for more expensive goods, where a customer is relatively loyal, you should give the customer your best (lowest) price, so they remain loyal.

He concluded his post with the following:

“You might leave money on the table if you reward people for being loyal (and don’t make them shop around each time). I think it’s money well spent, because loyalty is worth more than a little more margin. If you train your partners to shop around, expect them to shop around.”

What is the Best Pricing Strategy to Earn Loyalty?

In many situations, Seth is right. However, I once came across a company in the garbage collection business. In that business, a company had to price very aggressively to win a contract; and year after year, they would raise their prices without the contract going out to bid again. They usually keep a customer for about 10 years – enough time for prices to increase to two to three times the going rate on competitive bids.

The trick is that their prices are a small enough expense for their customers to avoid detection year after year. Loyalty may very well appear high, but it could also merely be inertia.

Seth’s comments certainly apply a lot of the time.

The price is relatively large, the customers buy from you multiple times, and it is not too difficult to switch vendors, absolutely positively consider his words. Consider giving competitive prices to your most loyal customers. However, as we say, every time we try to make a pricing generalization, it depends.

If pricing were easy, it wouldn’t be fun, would it?

 

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