Should Retailers Price for Loyalty or Price By Willingness to Pay? The Contradiction

When it comes to competitive pricing, value-based pricing maximizes your profits. At its simplest this means charge what your customers are willing to Pay (WTP). When you have the ability to charge different prices to different customers, charge more to the ones with higher WTP. We’ve discussed this as price segmentation in recent articles. What about loyal customers? In most cases, your loyal customers have the highest WTP. They know and like you. They like your service. They already trust you with their credit card information. They would certainly be willing to pay more than someone who doesn’t know you as well. So shouldn’t you charge them more because you can, because they have a higher WTP?

ANSWER: DON’T DO IT! Give your loyal customers your best prices. (This is the exception to segmenting price based on WTP).

Why? Because your loyal customers have the highest lifetime value for you. You want to keep them around for a long time. The fastest way to upset a loyal customer is for them to learn that they are paying a higher price than someone else who doesn’t deserve it. That may very well cause them to lose their loyalty, costing you lots of future revenue.

For example, I am pretty loyal to Amazon.com. I have an Amazon Prime account which gets me free shipping on everything. When I’m shopping for something, I will frequently just go to Amazon and purchase it without shopping around.

However, in Amazon’s early days they experimented with pricing, charging different prices based on a lot of things, including zip code. If I found out that they charged me more than they charge others, I would probably drop them and find someone else. If we assume I spend $1,000 a year on Amazon, think of how much they lose out by chasing me away.

As another example, I was a loyal Netflix subscriber, had been for years. They were getting around $20 per month from me. Oh, and I also talked them up to friends all the time. I loved Netflix. Then they raised my rates. This upset me, so I cancelled my subscription. Not only have they lost my revenue, but they spend a lot of marketing resources trying to woo me back. Oh, and now I talk badly about them, too. All because of bad pricing decisions.

Loyalty is hard to generate. It takes consistently great service and fair prices, but generates potentially huge lifetime value.

Takeaway:

Today’s advice: Absolutely use price segmentation, charge different prices to customers with different WTP. However, don’t charge more to your loyal customers. Rather, treat them with the utmost respect and service. Over their lifetime they will give you plenty of revenue. Don’t put it all at risk by raising prices.

Do you take loyalty into consideration when you price?  Thanks.  Mark

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Mark Stiving, Guest Contributor

About Author

Mark Stiving is a San Jose, Calif.-based pricing expert with 15 years' experience speaking, writing, coaching and consulting to help firms increase profits through value-based pricing. He is the author of Impact Pricing: Your Blueprint for Driving Profits; he blogs at PragmaticPricing.com and shares pithy thoughts on Twitter using @MarkStiving.
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