Irrationality Has Its Limits

23-JY-2016-Porsche-Cayman-GT4.jpgA couple years ago I wrote a post, The Myth of the Rational Consumer, in which I discussed evidence that customers really don’t want to change products or providers.  I expanded on those views in a subsequent post The Myth of the Rational Consumer – Take 2.   Much of the evidence I offered related to car owners who had selected specific brands and would not consider switching.  Some recent events have demonstrated that although customers tend to be inert, if pushed too far, they will switch.

One of the drivers, whom I called Bill, had owned 2 Loti (plural of Lotus) that had mechanical issues, so he had decided to get a new car – another Lotus.  The Red Bitch and Black Widow Maker had both been retired and Bill has been driving an unnamed 2015 Lotus Evora.  Of course, the new Lotus had a few issues over the past 2 years, but after each one, Bill was confident that the issue had been resolved and would not repeat. 

Earlier this month Bill shipped his Lotus to Sebring for a four-day track event.  It did not last the weekend, losing a clutch on the 3rd day.  During the weekend, however, Bill noticed that the Porsches were not breaking down.  He observed that they were engineered to be driven hard on the race track, and they kept going.  When he returned home, Bill decided to buy a Porsche.  Although he has been a very loyal Lotus driver and loves the styling, enough was enough.

That is just one anecdote, and anecdotes should not drive decisions; but it does illustrate a point.  Once inertia is disturbed, customer loyalty can drop quickly.  A client once shared an email with me from a previously loyal customer.  A new salesperson had been assigned to a territory and reached out to a customer who had not purchased lately.  The customer responded they had stopped buying because invoicing and payment had become “a pain in the ass.”  It was a customer who had been loyal and liked most things about the service, but they had been pushed to switch due to repeated problems with invoicing and payment.

Other clients have shared stories with us of customers who had been loyal and showed no price-sensitivity, but who ultimately defected.  The common theme was the customers were large and well-serviced, and their prices were substantially higher than those paid by other large customers.  For our clients’ customers, the costs of switching providers outweighed their perception of the savings they might reap from a competitor.  However, at some point a competitor approached them with very low prices relative to the industry.  Suddenly it looked like they had been gouged, and the value they had been receiving from our clients was not enough to offset the perception of being ripped off.  So, they left.

Serving customers and setting prices is complex.  Customers have different needs and different levels of price sensitivity.  They also all have some level of inertia, but that is not absolute.  So, when setting prices, we need to consider how our customers really make their decisions. Many customers decide the brand of a particular product to buy, and then never switch brands. Customers like that will not switch products or suppliers for modest price differences, and when you are selling to them, you should not get hung up on trying to match low prices. Spend your time focusing on building product or provider loyalty. Ensure that your quality and service are not disappointments, and your customers will be much less concerned about the price.  But also, be aware if you do disappoint them with poor service, or you stretch your prices too far compared to the value you bring them, or you shock them with a very large price increase, that inertia can be disturbed.  And when that happens, the customer loyalty you worked so hard to build can disappear.

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