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.
From the Coach’s Corner, more profit tips:
Do You Know What Drives Your Profit? (There Are 4 Drivers) — For profits, entrepreneurs must learn how to manage their financials and performance, which are difficult tasks. Savvy business owners know who their ideal clients or customers are. Entrepreneurs realize financial benefits when their revenue from business exceeds their expenses and taxes.
For Stronger Profits, Avoid 11 Typical Pricing Mistakes — In general, how can you manage the sweet spot – between your price-optimization and costs? Dennis Brown of the consulting firm, Atenga (www.atenga.com), says many companies make 11 pricing mistakes.
8 Strategies When Sales Drop and Costs Cut into Your Profits — If your sales are down and costs are hurting your profits, you’re certainly not alone. This is still not a good economy for many sectors. The irony is you can do something about it.
Checklist — 10 Tips for Leadership in Business Profit — In the new economy – a former Great Recession that seems to linger and linger – a company will succeed if it’s a leader in generating capital. Unfortunately, this economy has become a zero sum game for many businesses. Why? They stay alive by taking market share from their competitors, not by innovating.
For Profits, Manage Your Growth at the Right Pace — Entrepreneurs frequently try to rush their business growth. Certainly, growth is great but if you scale too fast, you’re looking for trouble. The key is to prepare.
”Nothing profits more than self-esteem, grounded on what is just and right.”
Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.
Image credit: www.scottliddell.net