I am constantly reminded that customers don’t always behave the way the say they will, or the way we think they will. Earlier this month I read an article in the New York Times, Why Trying New Things Is So Hard to Do. Then over the weekend I read Dan Ariely’s column Ask Ariely, in which he cited the impact of the endowment effect. A couple years ago, I wrote a blog post, The Myth of the Rational Consumer, in which I discussed car loyalty. All these articles pointed to behavioral traits that make customers loyal.
We all exhibit some level of loyalty to products or ideas. Once we have made a decision, we are comfortable with it, and we find limited upside in changing it. As examples, I have not changed the brands of personal care products I have used in years. I am happy with them, and switching to something else means I might not be as happy. Maybe I would like a different product just as much, but why take the risk? In a similar vein, my wife and I were recently talking with friends, and we all observed how we tend to frequent the same restaurants, and don’t try new places very often. We were confirming Sendhil Mullainathan’s observation in the previously mentioned NY Times article.
As another example, consider your cell phone platform. How many Android users do you know who have switched to an iPhone, or vice-versa? Most people know how to use the platform they have already adopted, and do not want to go through the pain of trying an alternative. Similarly, users of Apple Mac computers swear by them and do not want to use a PC running Windows. I personally tried to use our kids’ Apple laptops, and I was frustrated that things do not work the way they do in Windows. When I buy new equipment, I don’t even consider a Mac.
At Strategic Pricing Solutions, we have completed several studies for clients confirming customers are stickier (more loyal) than they think. In one study we examined the propensity of B2B customers to switch from the brands of consumable products they regularly purchased to generic equivalents. Although we found that approximately 10% of the customers would switch to lower-price off brands for a 10% price cut, most customers required a much larger price inducement to switch. Half of the customers would not switch for a 50% price cut, a 70% price reduction was needed before 30% would switch, and more than 10% of the customers indicated they would never switch.
When the focus of our study is the providers of products rather than the products themselves, we have often found the most important factor in a customer’s purchase decision is – have they bought from that provider in the past. From the customer’s perspective, there is risk in switching to a new provider. Responsiveness, delivery reliability, customer service levels, billing accuracy, and other factors could potentially be less favorable with a new provider. To the extent any of those factors affects the customer’s ability to do their own jobs, the cost of switching is often not worth the risk.
Loss Aversion is the behavioral principle behind this. Simply put, we don’t enjoy the gain from winning something as much as we dislike the pain of losing something. So, to take the risk of switching brands or vendors, our upside must be much, much higher than the downside.
Despite all I have just written, you cannot take your customers for granted. In particular, poor service or some type of shock to your relationship can make customers more willing to switch products or providers. Loss aversion only applies if the customer is happy with what they have.
From a pricing perspective, all of this means pricing is usually not the most important factor for your customers. If you are serving your customers well, they are unlikely to buy somewhere else for modest price differences. On the other hand, there are limits to how high your prices can be before your customers decide to leave. Abnormally large price increases and exorbitant premiums versus competitor prices can cause customers to look elsewhere. As we saw in our study of generic consumable products, the switching point is different for different customers.
Focus on providing great service, and make sure your prices reflect the value of that service. Your customers’ inherent loyalty means you don’t need to have the lowest prices to keep them, but you should also make sure you don’t do anything to upset them.