Price vs. Loyalty
The Debate Continues
By Jennifer Seitz

The word loyal is defined in Webster's Dictionary as "unswerving in allegiance."  I feel safe in saying that this is a quality universally desired in our customers.  While many of us are continuously looking for ways to instill, measure and retain loyalty in our customers, the ironic thing is that our customers would actually prefer to be loyal to us.  Think about - their loyalty in us is based on the high levels of service we provide them, the value-added benefits they receive, the advantages that come with an established relationship, a mutual feeling of trust, etc.  They can count on us; this is why they're loyal and it makes their lives easier and their projects more successful.

It's the ultimate win-win! As we all know by know, the cost of acquiring a new customer is high, higher than that of cultivating an existing customer.  Each new customer we obtain is a huge investment in effort, time and talent.  The loyal customers are what will sustain profits in time of economic fluctuation and for the overall long-term.  But, in this time of heavy competition, economic strife and tight budgetary constraints, we can't ignore the important role of price, can we?

Status Check - Fundamental marketing principles define 3 competitive arenas: price, quality and service.  Surprisingly, it really is that simple.  Defining which category your organization falls into is equivalent to defining your competitive advantage.  Do your customers choose to work with you because you have the lowest price, because you have a product with the highest-level of quality or innovation available to the marketplace, or because of your unmatched service?  The answer to this question should roll right off your tongue; your employees should know the answer and the majority of your efforts and budgetary investment should be focused on reinforcing this area.

Here are some great corporate examples to clarify the issue.  Volvo has equated its name with safety, innovation and quality.  Wal-mart has positioned itself successfully as a low-cost provider.  Nordstrom is positioned as a department store with the highest levels of customer service.  Which position is the best, you ask?  Unfortunately, the answer is not quite as simple and the debate has been burning among business strategists for decades.  The opinions have changed, shifted, flip-flopped and, in some cases, contradicted themselves.

The answer lies for most of us in the area of service.  If our product is not the most innovative and operating costs (not to mention the desire for profit) do not allow us to keep rock bottom pricing at all times - our competitive advantage is most likely service. 

Here's a great way to put it into perspective, if a first time customer chooses us because we have offered a lower price than the other companies that bid for the project and on the next quote we do not come in at the lowest price - who will they choose?


 If we have successfully created a loyal customer during the fulfillment of the first order, they will likely choose us again.  If not, they have no other variable to make their decision on but price and they will go with the lower priced provider.  So it boils down to this - the only way to retain customers based on lower pricing is to consistently be the lowest price out there.  The same is true of the quality/innovation factor.

The Economics of Loyalty - It is basic microeconomic theory that customers seek to maximize both the utility of service and the disutility of price. What this means is that customers are looking for top quality service at the best price. (Notice I did not say lowest price!)  The service-focused supplier is much more equipped to take the focus away from price by providing value-added service.

The result becomes this: loyal customers are cheaper to retain than non-loyal ones.  In fact, a loyal customer is willing to pay more than a non-loyal one would for the same product or service. In addition, the loyal customer has a higher overall value to the organization due to the value of repeat business and referrals.

Satisfaction vs. Loyalty - A loyal customer is different than a satisfied one.  If a customer perceives the value and benefit of your product to be worth the price paid, he or she is satisfied.  A loyal customer does consistent business with a supplier without looking for the existence of viable alternatives.  The loyal customer is more likely to provide a referral and build a relationship similar to a partnership with the supplier.

The Issue of Price - Price matters.  Customers care about price.  No one could dispute the truth of these statements, especially in today's economy full of cost-cutting initiatives and shrinking budgets.  The organization that is focused on loyalty must still remain aware of the price fluctuations in the marketplace.  A loyal customer has put trust in you that you are providing a fair and competitive price (not necessarily the lowest one available) and, to hold up your end of the bargain, you need to be able to do just that.

If, in fact, you're still reading this article chances are you are not on the fence anymore.  You agree that loyalty is your competitive advantage.  But, now you need to know how to obtain it and reflectively measure it.  There are many ways to reinforce and create loyalty starting at the grassroots level and graduating all the way to the multi-million dollar investment level. 

Constant Communication Plan -
This is an easy-to-implement way to create loyalty even for a small organization with an equally small budget.  Develop a way to communicate with your customers in a systematic, strategic way.  Once the order is received, don't let them fall into a production-schedule-wasteland that is only concerned about shipping addresses and credit card payments.  Designate a point person that will follow up with your customer at key points along the way to communicate with them and ultimately build a relationship. 

This can be easily achieved with a contact management program and a periodically scheduled letter, e-mail or phone-call - nothing more, nothing less. 

Here's an example.  The order arrives via fax.  Your point person places an introduction call to confirm the details and thank them for the order.  The order enters production stages, depending on time frame; the point person sends a letter or e-mail during this process to check on the project (an is-everything-going-smoothly-contact).  The order ships and now the point person calls to personally thank customer for the business and check on satisfaction level with the final product.  This may seem like a basic plan, but not many people are taking the extra time to do this.  It sets you apart.  Using a database to record phone calls is a great way to log personalized information about the customer for future relationship-building conversations.

The easiest way to define what your customers want is to ask them.  There are very sophisticated customer behavior profiling tools available on the market and online or print surveys are also a great way to pick the brains of your customer base.  But if that kind of effort is not in your budget, don't hesitate to just give some of your top customers a call and ask.  They will most likely appreciate the fact that you care and the answer just might take you by surprise!

Sell & Resell

As much as we all buy into this whole loyalty concept, we may sometimes forget that we need to continuously strive to achieve loyalty from the already loyal. We've established that acquiring a new customer is more expensive than serving an existing one. 



And, we agree that the loyal customer has the highest total value to our organization, but are treating new customers better than existing loyal ones? 

Unfortunately, we may be. In an effort to win the sale, we focus a lot of time and energy on the new customer and possibly take the existing ones for granted.   Make it a company-wide goal - If creating loyal customers is your goal, it should also be the goal of every employee in your organization - from the national sales reps to the order takers to the shipping department.  Anyone whose work directly affects the opinion and loyalty level of your customer should be focused on this goal.  There are many ways to create this atmosphere including mission statements, individual reward and recognition for innovation of service, company-wide success sharing goals based on loyalty, detailed loyalty-creating training programs and much more.< class="normal">Dianne Durkin, founder of the Loyalty Factor, LLC based in Portsmouth New Hampshire, works with companies to teach employees how to create loyalty in customers. She has developed a successful training program that focuses on communication, teaching customer contact employees how to understand their own unique communication styles, and how to build rapport with the unique types of customers that they are working with by truly understanding their needs.  According to Diane, "Companies don't create relationships.  People do.  Companies that successfully instill loyalty have employees that succeed in building trust and respect with the customer."

Measuring Loyalty

Let us assume for the sake of argument and the rest of this article that your goal is to create loyal customers.  I am sure you would agree that any goal has to have a measure of success and raw sales figures alone are not enough to accurately gauge the level of loyalty your customers feel toward your organization.

One of the more popular measures that companies use is a combination of repeat purchase behavior and intention to buy again.  Solely measuring the repeat purchase behavior can give you a false positive for a myriad of reasons.  Your customer may have continued to purchase from you even though they are unsatisfied with your product because your location is convenient, they have not yet had the chance to look around for a new supplier, or they are locked into a contract. 

These customers are not loyal. Once you create a solid gauge for the level of loyalty for your unique organization, you can keep track of your success and reward your employees accordingly.  Another great tool that can be developed is an early warning system.  This measurement will look at previous behavior of your loyal customers and devise a red flag alert for those who might soon fall off your radar screen.  Once they are gone it is near impossible to get them back.

Have we ended the age-old debate over price versus loyalty by now?  I doubt it, but if one thing has becoming increasingly clear is that repeat business and customer life cycles are of true value to almost any business.  Price is more than ever an important factor to the marketplace but being able to depend on a company that you trust, that is one step ahead of you, making you look good and feel important also has an important value. 

Building a business of one-time customers is a dangerous proposition for just about any organization and competing on price only works if you're profit margins are so lean that you will always be the lowest price.  Of course, if you are offering a product that no one else has and the quality or innovation is such that your customers choose you for these reasons, you should keep your investment and focus on constantly improving and reinforcing your product quality.  But, for most of us, our main advantage and one of the factors that we have the most control over will always be service and ultimately our customers' loyalty to us.

Jennifer Seitz, MBA, founder and President of Marketing InSeitz, has worked in the field of Marketing for over 10 years. She has experience creating successful strategies, brand identities, and creative content for large and small corporations in a wide array of industries.  You can learn more about her services and contact her at marketinginseitz.com.