Why Customers Leave …
Most companies assume that their customers are highly price-sensitive. They design their marketing programs with this idea in mind. When they have sales, more people buy. When their products or services are not on sale, less people buy. What more proof of price sensitivity do you need?
Transaction vs. Relationship Buyers
Actually, you need a lot more proof, because the response to discounted sales is usually quite misleading. As Paul Wang, associate professor of integrated marketing communications at Northwestern University, points out, there are, in general, two types of customers: transaction buyers and relationship buyers. A transaction buyer is someone who is interested only in price. These buyers have no loyalty. You can keep your warehouse open on a Saturday afternoon to meet some special need they have. The following Tuesday, when they have another requirement, they will bid it out. These people will leave you for a penny’s difference in price. They have all the catalogs and know all the competitors’ prices. They spend hours on the Internet researching products before they buy. They can afford to wait. They take pride in getting the best deal.
The other type of buyers are relationship buyers. These are people who look for a supplier they can trust. They are seeking friendly companies with reliable products—people who recognize them, remember them, do favors for them, who build a relationship with them. Once they find such a supplier, they tend to give them all their business. They know they can save a buck here or there by shopping around, but they find the process wastes too much of their time and emotional energy. Relationship buyers, if properly cultivated, will stay with you for a lifetime.
The Truth About Discount Pricing
Brian Woolf, president of the Retail Strategy Center and author of “Customer Specific Marketing,” said this:
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.
What is wrong with assuming price sensitivity? By having discount sales, you gradually convert your relationship buyers into transaction buyers. Instead of thinking about recognition, service, helpfulness and relationships, you gradually train them to think only of your product’s price. You train them to check the prices of competitors’ offerings and to use the Internet for further comparison shopping. You ruin perfectly good relationship buyers by the way you treat them.
Why Customers Leave
Why do customers leave your company, anyway? There are only four possible reasons:
1. They die, or are no longer buying in your category.
2. They are unhappy with the price.
3. They are unhappy with the product.
4. They are unhappy with the way they are treated.
Management teams always focus on reason No. 2. “If we just cut our price below Company X, and let everyone know it, our customers would never leave,” they reason. But research in a wide variety of industries shows that reason No. 4 is the most common factor driving customer churn. Why is this so? Because what binds relationship buyers to your company is not the price alone, it is the totality of the relationship, which includes:
• friendly employees;
• brand identity; and
• product quality and price.
Five Ideas to Help Reduce Churn
Relationship buyers stop buying when you stop loving them and stop treating them as they want and expect to be treated. How can you hang on to relationship buyers?
• Know who they are. Keep track of them in a database. Let your employees at every branch, or on the telephone, know who your gold customers are. Be sure they are treated as gold.
• Communicate with them. Find special ways to build a relationship with them. Thank them for their business.
• Use your best customer service people with them. Some banks segment their customers by profitability. When the phone rings from a profitable customer, their automatic call distributor uses automatic number identification technology to shift these calls to a specially selected “gold” customer service team.
• Build equity in the process. Provide rewards for volume business and for length of service. Make it expensive to leave.
• Don’t stress price. If your neighbor helps you carry a heavy item of furniture upstairs in your house, you would never think of offering him money. You will supply a beer or a cup of coffee and conversation. This is what your relationship buyers want. They want to be treated like a good neighbor—a good friend.
Arthur Middleton Hughes is vice president/solutions architect at KnowledgeBase Marketing in Richardson, Texas, which maintains databases, provides prospect names and conducts data processing, analytics and marketing strategy for clients. Hughes is the author of “Strategic Database Marketing,” 3rd ed. (McGraw-Hill 2005). He can be reached at email@example.com or at (954) 767-4558.