Customer retention - why most companies have it wrong
By Michel Adar on Nov 29, 2011
At least in the US market it is quite common for service companies to offer an initially discounted price to new customers. While this may attract new customers and rob customers from competitors, it is my argument that it is a bad strategy for the company. This strategy gives an incentive to change companies and a disincentive to stay with the company. From the point of view of the customer, after 6 months of being a customer the company rewards the loyalty by raising the price.
A better strategy would be to reward customers for staying with the company. For example, by lowering the cost by 5% every year (compound discount so it does never get to zero). This is a very rational thing to do for the company. Acquiring new customers and setting up their service is expensive, new customers also tend to use more of the common resources like customer service channels. It is probably true for most companies that the cost of providing service to a customer of 10 years is lower than providing the same service in the first year of a customer's tenure. It is only logical to pass these savings to the customer.
From the customer point of view, the competition would have to offer something very attractive, whether in terms of price or service, in order for the customer to switch.
Such a policy would give an advantage to the first mover, but would probably force the competitors to follow suit. Overall, I would expect that this would reduce the mobility in the market, increase loyalty, increase the investment of companies in loyal customers and ultimately, increase competition for providing a better service.
Competitors may even try to break the scheme by offering customers the porting of their tenure, but that would not work that well because it would disenchant existing customers and would be costly, assuming that it is costlier to serve a customer through installation and first year.
What do you think? Is this better than using "save offers" to retain flip-floppers?