The following case study is a composite made up of the actual experiences of several companies that have adopted loyalty based pricing programs. It has been written to provide an example of a successful program while maintaining the confidentiality of the companies involved.
The XYZ company, a dominant force in the high technology industry, was facing the entrance of a new competitor. At the time, there were two other significant players in the industry, and while XYZ enjoyed a 75%+ market share, some customers were showing signs of dissatisfaction. Complaints that XYZ’s dominant position in the market had led to arrogance and an inflexible attitude were becoming more frequent. Indeed, many buyers made no attempt to hide their enthusiasm for the impending entry of a new competitor for XYZ. Against this backdrop, XYZ began to search for a pricing strategy to defend itself from possible market share erosion while maintaining profitability.
The Loyalty Program
In its search for a defensive pricing strategy, XYZ explored the feasibility of implementing a loyalty program. While management was wary of the amount of time and resources that would go into implementing a loyalty program, they also recognized that a loyalty program might be their best defence against the new competitor, for several reasons.
For starters, a loyalty program would send a strong signal to customers that XYZ was prepared to recognize and reward their loyalty in the face of new competition. This was an especially important message to communicate, given XYZ’s reputation for arrogance and inflexibility.
Management also realized that a loyalty program could be a tactic where pricing details would not be readily transparent to competitors. A loyalty program would thus be unlikely to incite immediate price retaliation from the new entrant. In addition, if successfully executed, the program would provide a long-term competitive advantage to XYZ by discouraging customers from diverting business to the new entrant. Finally, management concluded that if they did not implement a loyalty program, the new entrant might. The advantages of being first in an industry to implement a loyalty program are usually enormous. Once a customer has made a commitment to a particular program, it is often difficult to dislodge the customer’s loyalty. (Consider how often members of a particular frequent flyer program go out of their way to fly with ‘their’ airline.)
Designing the Program
One of the first steps taken by XYZ in designing the loyalty program was to hold a brainstorming session with the sales force to determine what products or services offered by XYZ were highly valued by its customers and, at the same time, not replicable by any of its competitors. During the brainstorming session, the group identified XYZ’s breadth of product offerings as key to implementing a successful loyalty program. In essence, XYZ was the only significant supplier of a full systems solution, encompassing both hardware and software. By leveraging off this dominant position, XYZ management felt it could also promote customer loyalty.
The program provided customer discounts based on three major criteria:
Percentage of XYZ product bought relative to purchases from the competition
Volume purchased of a single product
Number of different products purchased.
This loyalty program was a tremendous success for XYZ. Not only was the potential erosion of both margin and sales halted, but many current customers actually increased their purchases. Moreover, although other competitors – including the new entrant – attempted to introduce their own loyalty programs, XYZ had achieved the dual advantage of being first in the industry to implement a program, and designing a program based on features that were very difficult for competitors to copy.