Price Breaks? Make New Customers, But Keep the Old

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Businesses hoping to lure new consumers with price breaks and special deals must be careful not to upset -- and potentially lose -- existing customers in the process, according to a researcher at the Massachusetts Institute of Technology's Sloan School of Management.


Alison KC Lo, who teaches consumer decision making, said the key lies in convincing current customers that there's a good reason to give other people those better deals.


"The majority of a particular product's buyers may not be high-end users, but they want to know that high-end users want to buy the same item," Lo said. "Rather than feeling slighted, existing customers can actually feel reassured when they find that 'experts' use the same product -- even if the high-end users are paying much less or even nothing at all."


But at other times, non-targeted customers can be repelled when price incentives are given to someone else, she said. The challenge is to recognize when what Lo called "the psychological mechanism" works. An example of this is when a manufacturer provides a swimsuit to Olympic swimmers for free.


But when customers already are familiar with a product, such as a phone company's long-distance service, it's unlikely that they will be swayed by the psychological mechanism of offering the product for free or at a reduced price to new users. Indeed, Lo said, sellers risk losing existing customers when they offer incentives to new ones. But rather than just feeling resentful, existing customers can level the price playing field in their direction as well.


"Existing customers should react rationally rather than emotionally," she said. "In general, if you know the deal being offered to new users, customer service will sometimes match the offer."


Melissa Campanelli covers postal news, CRM and database marketing for DM News and DMNews.com. To keep up with the latest developments in these areas, subscribe to our daily and weekly e-mail newsletters by visiting www.dmnews.com/newsletters


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