Why Customers Leave …
For years, retailers have argued that having regularly advertised, deeply discounted prices brings price-oriented customers into their stores but that over time, these customers convert into regular, profitable customers.
Research at the Retail Strategy Center shows that this widely held belief is a myth. A handful of these customers do convert into “good” regular customers, but the majority actually defect within 12 months of their first shopping visit. I have yet to find a retailer anywhere in the world whose investment in this type of shopper has yielded an attractive return on investment.
Research from consulting firm Oliver Wyman Group has shown that for hotels, gas stations, and drug or food stores, only 15 percent to 30 percent of customers are price-sensitive. The other 70 percent to 85 percent are loyal customers who provide most of the profits.
In this illustration, each company has a base of relationship buyers. When their products are on sale, they also attract a small additional group of transaction buyers. But when their competitors’ products are on sale, this same group of transaction-oriented customers jumps ship to take advantage of the discounts. In a few days, they move on when they hear of another price advantage somewhere else. Meanwhile, of course, the management of each company is telling itself that its customers are all very price-sensitive, and it has the sales figures to prove it!
Transaction buyers give you very little profit. Since they only buy discounted items, the margin on their sales is much lower than the margin on relationship buyers’ sales. In fact, you may find that your relationship buyers are subsidizing the sales to your transaction buyers. For example, you provide special express lanes for people who buy fewer than 10 items. Your regular customers with a loaded shopping cart have to wait in long lines.