Most companies assume that their customers are highly price sensitive. They design their marketing program with that idea in mind. When they have sales, more people buy. When they are not on sale, less people buy. What more proof of price sensitivity do you need?
Transaction vs Relationship Buyers
Actually, you need a lot more proof, because the response to discounted sales is usually quite misleading. As Paul Wang, Professor at Northwestern University points out, there are, in general, two types of customers: transaction buyers and relationship buyers. A transaction buyer is someone who is interested only in price. These buyers have no loyalty. You can keep your warehouse open on a Saturday afternoon to meet some special need that they have. The following Tuesday when they have another requirement, they will bid it out. These people will leave you for a pennys difference in price. They have all the catalogs and know all the competitors prices. They spend hours on the Internet researching before they buy. They can afford to wait. They take pride in getting the best deal.
The other type of buyers are relationship buyers. These are people who are looking for a supplier that they can trust. They are seeking friendly companies with reliable products people who recognize them, remember them, do favors for them, who build a relationship with them. Once they have found such a supplier, they tend to give them all their business. They know that they could save a buck here or there by shopping around, but they find the process wastes too much of their time and emotional energy. Relationship buyers, if properly cultivated, will stay with you for a lifetime.
Brian Woolf, President of the Retail Strategy Center and author of Customer Specific Marketing, said this: "For years, retailers have argued that having regularly advertised, deeply discounted prices brings price-oriented customers into their stores but that over time, these customers convert into regular, profitable customers.
Research at the Retail Strategy Center shows that this widely held belief is a myth. A handful of these customers do convert into "good" regular customers, but the majority actually defect within twelve months of their first shopping visit. I have yet to find a retailer anywhere in the world whose investment in this type of shopper has yielded an attractive return on investment."
Mercer Management consulting research shows that for hotels, gas stations, drug or food stores, only 15% to 30% of customers are price sensitive. The other 70% to 85% are loyal customers who provide most of the profits. In fact, if you could take an Olympian view of the situation, it might look something like this:
Each company has a base of relationship buyers. When the products are on sale, they attract a small additional group of transaction buyers. When their competitors products are on sale, this same group jumps ship to take advantage of the discounts. In a few days, they move on when they hear of another price advantage somewhere else. Meanwhile, of course, the management of each company is telling themselves that their customers are all very price sensitive, and they have the sales figures to prove it!
Transaction buyers give you very little profit. Since they only buy discounted items, the margin on their sales is much lower than the margin on relationship buyers sales. In fact, you may find that your relationship buyers are subsidizing the sales to your transaction buyers. You provide special express lanes for people who buy less than ten items. Your regular customers with a loaded shopping cart have to wait in long lines.
What is wrong with assuming price sensitivity? By having sales, you gradually convert your relationship buyers into transaction buyers. Instead of thinking about recognition, service, helpfulness, and relationships, you gradually train them to think only of the price of your product. You train them to check the prices of competitors and to use the Internet. You ruin perfectly good relationship buyers by the way you treat them
Why Customers Leave
Why do customers leave your company, anyway? There are only four possible reasons:
Managements always focus on reason number two. "If we just cut our price below Company X, and let everyone know it, our customers would never leave." But research in a wide variety of industries shows that reason number four is the most common. Why is this so? Because what binds relationship buyers to your company is not the price alone, it is the totality of the relationship which includes:
Relationship buyers stop buying when you stop loving them, and stop treating them as they want and expect to be treated. How can you hang on to relationship buyers?