Customer relationship theory rests on a set of assumptions declared as truths. One of these assumptions is that a business will be able to make more profits from established loyal customers as it will be able to charge these customers higher prices and these customers will be willing to pay. Lets take a look at how well this assumption holds up in the real world.
One only has to look at the B2B world to find instance after instance where powerful customers are able to extract favourable terms from their suppliers whether these suppliers are renowned marketing agencies, management consultancies or software/IT companies. If I know I am a valuable customer and I know that you know that I am a valuable customer then I expect you – my supplier – to compensate me for it either through keen pricing, a better (customised) fit between what you offer and my needs, and/or higher service levels.
When it comes to the B2C world my RAC experience is instructive. For about 10 years I had been a member of the RAC – car breakdown cover. As the years racked up I noticed that my annual renewal kept going up and up. At first I did not pay that much attention as the increases were relatively small. Then two years in a row I spotted increases of the order of 20%+. This prompted me to think that I was being milked with the automatic renewals so I did a lot bit of shopping on the Internet.
Within five minutes I figured out that I could take out exactly the same breakdown cover with the RAC through the Internet at 2/3 of the price that the RAC was going to charge me through the automatic renewal; I selected the RAC as the comparison shopping showed that the RAC came out top when the factor of price and customer review ratings were looked at together.
Did I follow the theory and say “Look I have been with the RAC for ten years and over that time I have had a several breakdowns and the RAC has looked after me so it is worth paying 1/3 more than I need to pay so lets pay it?” No. I cancelled the automated renewal by phoning the RAC call centre. And simultaneously I took out cover with RAC via the Internet. The whole effort took me 5 minutes – in the comfort of my own home.
The principle of reciprocity is simple. You scratch my back, I’ll scratch yours. I had been operating on that principle with the RAC and then it became clear to me that the RAC had not. The result: I do not trust the RAC and I do not suspect that I will ever trust the RAC. Furthermore, I now have a decision rule: always, always do comparison shopping before renewing contracts with an existing supplier.
In the real world, human beings – across many societies – are brought up with the law of reciprocity. Long term loyal customers expect the business to reciprocate by providing better value through a combination of price, the products fit to needs and service: they expect to be treated better than new customers. This is the opposite of what is supposed and asserted as truth in customer theory.
To conclude: if you are selling customised solutions that take time and effort – from you and your customer – to customise and get right then you can charge a higher price. However, if you are selling a commodity (like the RAC) then the best way to drive away loyal customers is to milk them by charging them higher prices.