Researchers are warning businesses that their customer-loyalty programs, which are designed to increase repeat business, may be causing more harm than good.
Even though “customer prioritization” is widely used by companies, the researchers warn they’re a double-edged sword and represent the dark side of customer loyalty programs.
As a result, businesspeople get stressed out after implementing customer-loyalty programs because they lose profits when they unknowingly and disproportionately increase service costs.
“This dark side results because prioritization signals to customers that they are very important to the firm, and this leads them to feel entitled to demand more from their exchange partners,” explains Alex Zablah, associate professor of marketing at George Mason University’s School of Management in Fairfax County, Virginia.
“Ultimately, entitlement-driven customer behaviors undercut profitability by increasing firms’ cost to service their relationships with customers,” he adds.
His co-authors are Hauke Wetzel and Maik Hammerschmidt from the University of Göttingen in Göttingen, Germany.
After conducting two studies in B2B sectors, which led to similar conclusions, they published a report: Gratitude Versus Entitlement: A Dual Process Model of the Profitability Implications of Customer Prioritization.
“Ultimately, entitlement-driven customer behaviors undercut profitability by increasing firms’ cost to service their relationships with customers.”
Tactics — dos and don’ts
The professors assert that certain types of tactics result in negative effects. “If firms focus their prioritization efforts on ensuring a good match between customers’ needs and the products they buy, then dark side effects are negligible,” says Professor Zablah.
However, he warns if companies focus on providing customers with symbolic benefits, like labeling them as “VIP,” the dark side tends to become more pronounced because customers are alerted to the fact that they are considered more important to the firm than other customers.
“Contrary to popular belief, sharing prioritization schemes with customers can backfire for firms,” he adds.
When customers learn of the prioritization program, they begin to feel a sense of entitlement — that they can get more than is reasonable.
Professor Zablah recommends such prioritization programs should used with great diligence. It’s important to show appreciation but not at the unreasonable expense of profits.
Indeed, added value is a good thing. But too-much service resulting in a sense of entitlement can be a negative sales opportunity cost. Time is money, too.
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