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.
Charlie, a loyal customer of his local bank, had never thought of taking his business elsewhere, but the offer from a competing bank to refinance his mortgage at an extremely low interest rate seemed too good to pass up. He asked Rick, the loan officer he had been dealing with for years, if the bank could match the offer. Rick knows lowering Charlie’s mortgage rate won’t be good for the bank’s bottom line, but he thinks making a long-time customer happy is worth the investment. Should the bank match the offer, or should it let Charlie go?
This anecdote, while fictional, represents a real customer management dilemma faced by many companies nowadays: Should we offer better deals to current customers or to new ones? In particular, at what cost should we keep current customers, as opposed to seeking out new ones? The question is simple, but the answer is not.
A quick scan of offers found in the marketplace does not reveal obvious commonalities and provides little insight. While airlines give lavish frequent-flyer packages to their most loyal customers, wireless carriers generally focus on wooing new customers through introductory deals. Hotels often do both. Apparel catalog retailers send special discount “value” catalogs to existing customers, whereas magazines, newspapers and software companies often offer discounts to new customers by offering them lower introductory prices.
But would it, for example, be more profitable for a newspaper to offer a better price for subscription renewal rather than new subscriptions? Should a wireless carrier instead offer lower rates to its high-volume customers who have stayed with the carrier for a long time? Should a hotel, airline or retailer offer better rates to new customers it aims to acquire? Ultimately, how can a manager reconcile the demands of current customers with the need to
attract new customers?
Expert opinions on this subject conflict. On one side, you can find people who argue that careful attention to the needs of existing customers like Charlie deepens the relationship between customer and company. That, in turn, leads to continuous increases in customer satisfaction, loyalty and company profitability in a virtuous cycle of mutual benefits. Customers get better rewards, and the companies get more business from those customers.