Is it better to reward existing customers for loyalty — or spend your marketing dollars on attracting new ones? Here is a framework to help you decide.
Should you offer your best prices to new customers or existing ones?
The question is simple, but the answer is not. An analysis by Jiwoong Shin and K. Sudhir, both of the Yale School of Management, shows that the answer depends on customers’ shopping flexibility and the degree to which some customers are more valuable than others.
“In many markets, not all customers are equally valuable,” the authors write. “Some contribute far more to a company’s profits than others. An American Express executive, for example, once reported that the best customers outspent others by 16 to 1 in retailing, 13 to 1 in restaurants, 12 to 1 in airlines and 5 to 1 in hotel/motels.” The authors define this imbalance as value concentration.
On the other hand, some people argue that existing customers, simply by virtue of purchasing from a company in the past, have demonstrated that they prefer a company’s products or services, and can be “punished” with higher prices than new customers receive. By this argument, rewards and incentives are better served by focusing on new customers.
So which customers should you reward?
“We discovered that most of the time, rewarding and acquiring new customers creates the most value,” write Shin and Sudhir. “Under select circumstances, however, attention should shift to the retention of existing high-value customers.” When consumer preferences are highly fluid — meaning that a shopper may generally prefer one company but still shop others out of convenience or other reasons — and when the highest-value customers are much more valuable than others, then companies should focus on rewarding their best existing customers. But if either of those characteristics is not in place, Shin and Sudhir’s research found that companies do better offering their best prices to new customers.