Higher Prices: The Odd Reward for Being a Loyal Customer

Businesses Overlook Existing Customers to Attract New Ones, Raise Profits | Moneyland | TIME.com /* */ Home TIME Magazine Photos Videos Specials Topics Subscribe Mobile AppsNewslettersRSS @TIME NewsFeed U.S. Politics World Business Money Tech Health Science Entertainment Opinion SEARCH TIME.COM Full Archive Covers Videos Saving & SpendingBankingBorrowingBudgetingCredit CardsIdentity TheftOdd SpendingSavingSmart SpendingTaxesPlanningDecision MakingEducational FinancingEstate PlanningInsuranceRetirementInvestingBondsMarketsPortfolio StrategyStocksWall StreetReal Estate & HomesForeclosuresHome ImprovementHome-Equity LoansMortgagesReal Estate MarketsReverse MortgageCareers & WorkplaceCareer StrategiesJob MarketsSmall BusinessesWork/Life BalanceEconomics & PolicyFinancial Values SurveyFinancial ReformPsychology of MoneyScamsThe EconomySpecials Psychology of MoneyHigher Prices: The Odd Reward for Being a Loyal CustomerBy Brad Tuttle | @bradrtuttle | October 18, 2011 | View CommentsTweetPhoto-Illustration by Alexander Ho for TIME; Getty Images (2)

New customers are routinely wooed with special discounts for services like pay TV and newspaper subscriptions. Existing customers, on the other hand, can expect regularly escalating bills unless they put up a fight or beg for a price break. Why do businesses treat loyal customers this way?

The short answer is that the pricing structure that favors new customers makes business sense, even though it’s also guaranteed to annoy many existing customers. Jacking up prices is standard business practice for pay TV, wireless plans, and newspaper and magazine subscriptions, and the short-lived special perks and introductory rates on credit cards and bank accounts work in the same way too.

But shouldn’t a business give the best treatment—along with the best prices—to its best, most loyal customers? That’d be nice, but it’s not the way things play out in the marketplace.

(MORE: Customer Service Hell)

A Minneapolis Star-Tribune column explains that, as odd as it may sound, new customers who have never given a company a dime are valued more than existing customers who have been paying regular monthly bills for years. Or at least a business’s ability to attract new customers is valued more highly by investors:

“New acquisition looks good for investors,” explains David VanAmburg, managing director of the American Customer Satisfaction Index, which tracks how happy customers are with everything from TV service to pet food. Unfortunately, shareholders, not customers, rule.

Once a customer is on board, the typical business M.O. is to maximize the amount the customer will spend, hoping that some combination of appreciation for the service and the inertia causing consumers to stick with the status quo allows the business to make larger profits without causing the customer to cancel the service or otherwise jump ship. Businesses bank on the “personal life hassle cost”—a phrase summing up the time, energy, and other hassles required to switch service providers—as an argument for customers to just submit to higher bills. It is someone’s job (probably, many people’s job) to carefully calculate how to sneak in incremental price hikes without overdoing things and chasing away customers.

This business model creates profits, at least in the short run. What it doesn’t create are genuinely loyal customers—just ones who stick with the company because they don’t want to be bothered to cancel.

(MORE: Raise Prices in a Slow Economy? Nice Try)

Psychologists call the tendency to avoid change and stick with the familiar “cognitive fluency,” and it affects consumer behavior, and the way consumers are treated by companies, in obvious ways. At some point, a company is likely to overplay its hand and raise prices too quickly and without adequate explanation or justification, and its mildly annoyed customers will get annoyed enough to drop the service. Just look at what’s been happening with Netflix.

Brad Tuttle is a reporter at TIME. Find him on Twitter at @bradrtuttle. You can also continue the discussion on TIME’s Facebook page and on Twitter at @TIME.

Read other related stories about this:The high price of loyaltyStarTribuneRelated Topics: bills, brand loyalty, cognitive fluency, inertia, pay TV, utilities, Banking, Credit Cards, Economics & Policy, Psychology of Money, Saving & Spending, Smart Spending
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