The Price of Loyalty

Seth Godin blogged on pricing the other day, which of course requires a response.

Seth’s position is that for more expensive goods, where a customer is relatively loyal, you should give that customer your best price so that he or she doesn’t leave you when they suddenly find you have been overcharging them.  He closed 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.”

In many situations, Seth is right.  However, I ran into a company the other day that was in the garbage collection business.  In that business a company had to price very aggressively in order to win a contract, and then year after year they would raise their prices without the contract going out to bid again.  They tend to keep a customer for about 10 years, enough time to get that customer to pay 2 to 3 times what they will pay when they go out to bid again.

The trick to this business is that it is a small enough piece of the companies expenses (even though it is a big number) that they don’t focus on it every year.  Loyalty may appear to be very high, but it’s really just inertia.

The lesson to take away is that Seth is right in a lot of (most) cases – where the price is relatively large, the customers buy from you multiple times, and it is not too difficult to switch vendors.  If you have an offering with these characteristics, absolutely positively consider his words.  Consider giving your most loyal customers your best prices.  However, like we say every time we try to make a pricing generalization, it depends.  But then if pricing were easy, it wouldn’t be fun, would it?

Mark Stiving