The Paradox of Pricing: How simplifying price sensitivity can heighten price awareness

STANDING at the gate of an amusement park, you take one more look at the fine print on the back of the admission ticket and another at the sign over the gate. Didn‘t the tour operator say, “All-inclusive?” What exactly does that mean anyway? Very often customers are sometimes puzzled by how much a product or service or, in the case of an amusement park, an experience is really costing them. They are not alone. This puzzlement is something that that also intrigues price setters as well.

Do customers, in fact, budget for the entire cost of the product or service that they are buying or just the ticket price? Also faced with a complex bundle of services, do they add up all the various components (some of which your company offers and some of which it does not) to arrive at a total cost for the products and services that they have purchased?

The answer: Price sensitive customers are more likely to be aware of the total cost, while price insensitive customers tend to be more impulsive and less calculating. This leads to some important pricing strategy considerations.

The travel and tourism industry provides a perfect example of how companies position themselves within a highly complex mix of products and services. The cost of a vacation cruise, for example, involves not just on-board costs but airfare to the cruise ship, sightseeing and shopping at ports as well. Ski resorts similarly have to balance the price their customers pay for travel and accommodation with the cost of lift tickets, lessons and equipment.

Given the intricacy of the products and services, it is not surprising that cruise operators and resorts try to package and bundle the entire “vacation experience” for their customers. How well they succeed, however, often depends on how well they can segment their customers particularly with respect to price sensitivity. Price insensitive customers, as a rule, are less concerned about the overall cost of the mix of products and services that they are purchasing. Since they look at items individually (and more impulsively), they respond better to lower barriers to the entertainment experience.

For the tourism industry, this would suggest that low cost entry packages, perhaps combining just airfare, admissions, and other non discretionary spending, will be attractive to the less price-sensitive. The lower entry price can be easily offset with higher prices for direct entertainment and incidentals. In fact, since price insensitive customers are less aware (or less interested) in the total cost of the experience, lowering barriers by reducing initial prices could actual result in higher total spending.

Price sensitive customers, on the other hand, are far more likely to be concerned about the total cost of the products and services that they are purchasing. Reaching these customers means offering relatively complete packages to reduce their feelings of uncertainty. All-inclusive really should mean all-inclusive

Destination parks, such as DisneyWorld in Orlando, for example, know that for many of their customers a visit to their park requires a significant expenditure. Their price sensitive customers will have a relatively fixed budget, allocating funds for travel, accommodation, park admission and associated costs such as meals and the inevitable souvenirs. Because they understand the customer‘s behavior, Disney can balance the various components of the trip so that they can be allocated to the customer‘s budget in the most attractive way.

Ironically, in an effort to reduce uncertainty through the ”all inclusive‘ package, the cruise operator, the ski resort operator or the amusement park owner can actually end up elevating the price sensitivity of these types of customers and encouraging substitution. Once costs have been clearly defined, the consumer can not only look at directly competing packages (comparing cruise packages, for example) but also between competing vacations as well (if not cruising, why not a ski vacation in Colorado?).

This then is the paradox. Satisfying price sensitivity can actually heighten awareness of pricing. It demonstrates just how difficult it can be to balance a pricing strategy with customer purchasing behavior.

The Lessons for Business to Business Markets

The problem of price sensitivity and the bundling of complex purchases have as much implication for business-to-business markets as it does for consumer markets.

Understanding where you fit into the buying decision and how your customers behave has a significant impact on how you price and bundle your products and services. The more complex the buying process, the more challenging it becomes to understand the elements of price-value evaluation and behavior.

One of the basic decisions that every company has to make within the context of customer budgeting and buying behavior is whether complex pricing and price balancing works better than package pricing. As with consumer sales, there are strong arguments for bundling all of the components of a business sale. Many others, however, would suggest that keeping a sale complex provides significant opportunity to appeal to a broader array of market segments.

Industrial buyers, however, should be aware of the paradox that we have seen within the consumer industry. Bundling prices and services can seem to be attractive. But beware. Clearly defining the complete cost of product or service can lead to more not less competition. 

Can you explain your prices? The case for a pricing audit

By Michael Hurwich and Michael Oswald

                How often have you been confronted by your peers to provide an explanation for irregular or inconsistent pricing tactics? The reality is, companies spend much well intentioned time reviewing gross margins across products or categories but little time auditing net prices across accounts resulting in a possible loss of profits and in the very least an unexplainable situation at the managers meetings.

                Many managers are beginning to recognize the value of deploying a systematic review of their company's product/service pricing strategies. Robert Baker, Senior Priding Director from Armstrong World Industries suggests that, "Managers should be aware of or be guided by a set of well-founded principles to control price(s)". Unique discounts should be the exception, not the norm but often due to a lack of analysis, companies will fall trap to regular discounting and price exceptions, leading to money and potential cost lost.

                Proper value-based pricing strategies permit organizations to go after different market segments by delivering a variety of customized product and service offerings.

                Since the early 1990s, there has been a shift from the 'Old World' where one price suits all, to the 'New World' forces fences between different value offerings and pricing tactics.

                Pricing audits ensure that the correct prices are matched against the correct customer segments to ensure that those accounts that acknowledge value are also paying for it.

                At the end of the day, the benefits of good pricing practices can translate into value for all involved. End-users benefit from consistent interactions, pricing standards, and an increased focus on fulfilling customer needs.

                Employees enjoy better execution and satisfaction due to streamlined and consistent processes and better pricing training and value leadership. Shareholders appreciate the higher profits achieved through an efficient pricing process that captures the true value of a product or service.

                What is not so clear to many companies is what constitutes good pricing practices and, more importantly, when and how often a review of prices should be conducted across the organization's products, accounts & channels and the steps necessary to achieve them.

                A pricing audit should be conducted as part of the yearly accounting audit to obtain a barometer to externally measure prices against the marketplace, to internally ensure consistency across like accounts and further, ensure that profitability is maximized. It is a systematic, third party review of an organization's current product and service prices and pricing practices and should encompass every facet of the organization that either impacts or is impacted by pricing.

                While a centralized pricing unit is not necessarily required to accomplish the following steps, a well defined set of 'Rules of the Road' and coordinated activities are critical.

Pricing Audits should typically include the following:

STEP 1.

·         Understanding Your Corporate Goals and Objectives:

The primary reason that pricing strategies often fall short is because they are not aligned with corporate goals and objectives. Further, many organizations today struggle to maintain a uniform view of their goals and objectives.

·         Clear communication of corporate goals and objectives:

Whether it is revenue growth, profitability, market share, return on capital employed, or some combination is necessary to ensure the right pricing strategy is employed.

Remember: goals and objectives drive pricing strategies while pricing tactics flow from a clearly articulated strategy.

STEP 2.

·         Reviewing Current Pricing Practices:

In order to ensure pricing alignment across your company, a review of current pricing practices, discounts and incentives, customer segmentation, competitive landscape, product bundling, tied selling, etc. is required through a multi-faceted approach. This includes:

                1. Interviewing internal management;

                2. Interviewing the sales force

                3. Reviewing pricing across distribution channels;

                4. Benchmarking your company against direct and indirect                competitors; and,

                5. Analyzing historical data.

The Goal: To assess all areas within the organization (systems, marketing, sales, finance, distribution, operations and others) that impacts or is impacted by pricing.

STEP 3.

·         Identification of Opportunities for Improvement:

No matter how refined your pricing process is, pricing practices must be periodically reviewed and fine-tuned to respond to market forces.

                The degree of pricing refinement necessary is related to where your company resides on the 'pricing pyramid'. A well-executed pricing process is fundamental toward achieving corporate goals and objectives of improved operating profit.

                The SPMG 'Pricing Pyramid' example is a useful methodology to minimize ill-conceived decisions in circumstances when a customer is threatening to cut business unless a concession is provided.

                The higher your company resides on the SPMG Pricing Pyramid (http://pricingexperts.net/price-consulting.html) the less likely a pricing audit will reveal any unusual or inconsistent pricing practices.

Conclusion:

                Only through a third-party can companies avoid the internal jockeying for price positioning that often occurs across corporate silos. There are several other benefits of engaging external resources to conduct your pricing audit:

                1. Third Party Objectivity: It is virtually impossible for an employee of a company to provide an impartial view of the company's pricing practices. An outside-in perspective by individuals without a vested interest in the company provides the objectivity and credibility required to make an unbiased assessment of one's pricing practices.

                2. Knowledge Base: External pricing auditors have extensive experience broadening pricing competency with companies across all industry segments. These experiences create a continually expanding knowledge base that allows for the provision of 'Best Practices'. The result is often an immediate improvement through the identification, validation and recommendation of 'Quick Win' pricing process opportunities.

                3. Proven Pricing Methodology and Tools: Determining whether the true value of your product or service is supported by your pricing structure requires a tried and true methodology.  External pricing resources possess both the methodology and tools necessary to develop pricing strategies that are consistent with corporate, marketing and sales objectives. Often, the result is the discovery of hidden weaknesses that go undetected with ad-hoc internal price tweaks.

                While the difficulty of the current operating arena is typical of turbulent economic times, companies are not doomed to suffer the consequences. A pricing audit increases the likelihood for capturing and creating improved profitability versus the competition, enhances customer focus and lessens the possibility of provoking price wars.

3 Trends Shaping B2B Marketing

Here's how the savviest B2B companies will be delivering their message and proving their value to customers this year.

Article found on www.Inc.com Written by Lauren Cannon

For progressive and tech savvy business-to-business companies, traditional marketing techniques like entire departments dedicated to cold calling potential clients have largely been retired to the trash folder. Instead, these companies are rapidly embracing technologies and practices aimed at increasing productivity, using social media more effectively, and providing engaging and informative content to potential clients. For a deeper look at these trends shaping B2B marketing in 2011, read on.

Quantifying Value Creation

If you’re looking to make your case to another business, come with lots of data, says Keith Pigues, co-author ofWinning With Customers: A Playbook for B2B. You’ll need to quantify your value to customers in terms of dollars and cents, something known as “customer value creation.”

"Many organizations are finding that some of the more traditional customer satisfaction or customer loyalty measurement systems like ‘net promoter score’ are falling short when trying to provide a real financial measure to companies to help them understand exactly, 'how much more money am I making doing business with your company verses Company B or C?,'" says Pigues.

To accomplish this, companies are looking to third parties for help. Among them is Chicago-based Valkre, a technology provider that specializes in helping companies customize and match sales solutions to specific customers, implementing marketing strategies that increase a company's online visibility, and creating daily management plans that use mainstream technology.

Valkre founder Jerry Alderman agrees that the next evolution in B2B marketing involves businesses attempting to understand how the services they're offering truly impact the bottom line of their customers. Valkre has created a new metric, called the differential value proposition or "DVP", which measures the amount of increased profit that a customer can bring in by doing business with one company versus another. Unlike net promoter score, the DVP percentage metric was designed for use specifically within the B2B industry.

Targeting Online Identities

Whittling down to the individual buyer will increasingly be the objective in online B2B marketing, even in terms of broad awareness campaigns, says Steven Woods, theToronto-based CTO of Eloqua. Instead of generalized marketing initiatives, companies are beginning to analyze the online behavior -- also known as digital body language -- of individuals involved in the B2B industry in an effort to pinpoint the specific buyer whose needs best fit the services of the seller.

Through the collection and analysis of data, companies are discovering ways to link varied online "handles" across social networks to a single individual they wish to target for marketing purposes. "The vanguard will see a lot of people in 2011 figure out the identity management challenge and be able to understand ‘you’ across those identities and understand how your activity on Facebook, on Twitter, on LinkedIn, and the various social properties indicates your buying intentions," says Woods.

The goal is to cater marketing content to customers depending on where they are in the buying process. To accomplish this, Tableau Software, a Seattle-based seller of B2B software, uses a method of "scoring" visitors that come to their website. The more that users visit, the more their scores increase, allowing the algorithm to filter them into the programs within the site that speak to their interests. Thus, Tableau targets customers based on their online behavior rather than the demographics provided by their firm or industry.

"The trend of 2011 is that marketers are as interested in delivering relevant content to relevant people, as they are to stopping the delivery of irrelevant content to irrelevant people," says Elisa Fink, Tableau's vice president of marketing. "We don't want to be spammers. Every engagement with a company is really an engagement with a person."

Getting Creative with Content 

In terms of the content being delivered, B2B companies are encouraging members of their technology departments to build their personal brand and further the recognition of their company by becoming "expert" bloggers and content creators.

"The winning marketing skill set that is going to be very much recognized in 2011 is not going to be the creative copywriting, artistic skill setm," says Woods. "It's the person who understands numbers, analytics, data, workflow, the operational skill set."

This can be accomplished via the company website, Twitter stream, LinkedIn discussion group, and even the employee’s personal blog.

Woods explains that part of this trend is a move in favor of less polished content and faster production times. In the past, all marketing materials were placed under intense scrutiny before anything was put online to represent the company. Now, personal engagement is en vogue, whereby the members of a company with active knowledge about products can engage in two-way conversations with clientele on the fly.

"[The content] might even have spelling mistakes in it. If it's a video, it might just be a very quick, ‘hey, here is how I tackle this problem, here is how I view the latest merger in the industry, or view this latest technological development,’" says Woods.

Some B2B institutions are also beginning to explore new approaches to their chain of command within marketing initiatives. In larger B2B companies, the IT department typically reports to the operations department because that's where the most money has traditionally been invested. According to Alderman, that is now changing. He points to a major player in the industry taking the approach of having their IT department report to their marketing department. By doing this, information regarding a business' technological holdings and services can be more accurately and efficiently marketed to potential clients.

As the Web 2.0 advances into a new decade, B2B marketing strategies will also continue to develop. Indeed, there are an increasing number of digital platforms, like social media, for marketers to explore. In 2011, the winners will be the ones that are best able to target their efforts to their customers’ online habits and interests, and provide true value – and be able to prove it – to users.

Every Day Low Pricing: Pros and Cons

EVERY DAY LOW PRICING (EDLP) is a pricing strategy that has been a remarkable success for some manufacturers/retailers and a disaster for others. 

                        Despite some rather high-profile failures, the strategy attracts attention among all types of marketers. 

                        Recent reports indicate that 27% of consumer non-durable manufacturers and 23% of consumer durable manufacturers have adopted an Every Day Low Pricing strategy. 

                                                The key question is: “what conditions are most critical for successful implementation of the strategy?”

How it works

EDLP is a low-price strategy designed to enhance the competitive position of the supplier based on the following basic premises:

·          A consistent, competitive price will lead to an even demand for products

·          Inventory and other logistical costs will drop because of better management of product flows.

·          Promotional costs and other forms of trade spending will be reduced.

·          The cost advantages of steady demand and better inventory management will lead to even lower prices.

One of the advantages of EDLP is that it often leads to more consistent or predictable demand.                 Suppliers or retailers are able to more effectively control and forecast production, inventory costs, and shipping costs thus stabilizing demand

                        Since periodic deals are replaced by a single, no-deal low price, there is no advantage to customers to postpone a purchase.

                        Successful EDLP strategies tend to generate large volume sales that allow companies to cut costs and pass these savings along to customers.

                        At the same time, retailers or manufacturers are able to leverage their own buying power to reduce their purchase price. These savings, as well, are then passed along to customers. 

Where it works best

EDLP works best under many of the same conditions that support other low price strategies. Typically, these include:

·          Consumer demand is relatively unaffected by large seasonal variations or other timing considerations

·          The company is able to sustain a low price competitive position through a cost advantage

·          Consumers place little value in waiting for —deals“ on merchandise

·          Suppliers are willing and able to provide just-in-time delivery

·          The company‘s size justifies the investment in the information systems required to manage inventory turns precisely

                        Purchases that can be delayed or timed to coincide with price discounts are often less amenable to an EDLP strategy, while repetitive purchases lend themselves particularly well to this type of pricing.

                        Consumer disposables, such as toothpaste, soap, or groceries, for example, are typically purchased on a daily, weekly or – at most – a monthly basis.

                        Consequently, consumers have less ability to time the purchase of these goods in order to save money.

                        EDLP works well for these types of products, especially at a retail level, because it offers consumers a bundle of low prices on a range of goods that they buy on a regular basis.

Caution advised

                        Seasonal products and services such as tourism and snowmobiles, or highly perishable products such as flowers, have a limited shelf life and discrete time periods during which product or services must be moved. In these situations, EDLP may not be the preferred strategy.

                        EDLP often doesn‘t make sense where demand is so high that price increases are warranted, or when demand declines to the point that price discounts are needed to reduce inventories. Implementing EDLP for some consumer durables is difficult because consumers can often afford to wait for special deals or incentives to buy these products.

Article Written by

Michael Hurwich, President of SPMG

Big Energy Firms Face Pricing Clampdown - skynews March 21, 2011

Big Energy Firms Face Pricing Clampdown Article from: - skynews March 21, 2011

Gas and electricity suppliers have been accused of failing consumers by the regulator Ofgem which has proposed to sweep away "complex and unfair pricing practices".

After a review of the domestic energy market, Ofgem decided that complicated price tariffs and bad behaviour by suppliers have been stifling competition.

Ofgem chief executive Alistair Buchanan said: "Energy companies have failed to play it straight with consumers and so Ofgem is proposing to break the stranglehold the Big Six have over the electricity market.

"Consumers have told us that energy suppliers' prices are too complicated.

"It is no surprise that they are bamboozled when tariff complexity has increased from 180 to more than 300 since 2008.

"That is why we are planning to sweep away this complexity so suppliers' prices are fully exposed to allow easy price comparisons."

Ofgem is proposing to break the stranglehold the Big Six have over the electricity market.

Chief Executive Alistair Buchanan

The Big Six are British Gas, e.on Energy, EDF Energy, Scottish Power, npower and Scottish & Southern Energy.

Ofgem said that, for the first time, it had evidence that the suppliers had pushed up prices in response to rising costs more quickly than they reduced them when costs fell.

It launched its review in November after it emerged that price increases had seen suppliers' profit margins soar by 38%.

The regulator has given them eight weeks to reform the way they operate or it will refer them to the Competition Commission.

To avoid referral, it has asked suppliers to comply with a series of proposed reforms beginning with less confusing tariffs to allow customers to compare prices more easily.

Major companies would also have to auction up to 20% of the energy they generate to other suppliers to stimulate competition in the market.

Scottish and Southern Energy (SSE) said the proposals represented "potentially radical changes" to the British energy market.

"While SSE believes the market is fundamentally sound, it will participate constructively in this next phase of review and consultation, the firm said.

Meanwhile, rival British Gas said it welcomed the move to "improve electricity market liquidity and transparency in the reporting of company returns".

Energy Secretary Chris Huhne added: "Consumers deserve the best possible deal, which means rough and tough competition in the marketplace."

The lobby group Consumer Focus claimed the structure of the energy market currently made it "nigh on impossible" for new companies to enter.

Chief Executive Mike O'Connor told Sky News: "Consumers have less confidence in energy companies than in any other sector - they feel that prices aren't fair, that tariffs are too complex and that the market doesn't treat them well."

"(Energy) companies are now on a very short leash. If they cannot show the will and capacity to change we would expect Ofgem to refer aspects of the markets to the Competition Commission."

Ofgem has also announced an investigation into whether Scottish Power charges unfair prices to customers who are not signed up to pay their bills by direct debit.

A Scottish Power spokesperson said: "We believe that our pricing is cost reflective and in accordance with Ofgem's Guidelines, but we will of course co-operate fully with Ofgem in the investigation and in reviewing their concerns."

Other investigations into the handling of complaints and mis-selling by other energy companies are continuing.

Video and Article http://news.sky.com/skynews/Article/201103115956854

Sobeys expected to follow competitors, hike prices - Article by ROGER TAYLOR in The Chronical Herald

Sobeys expected to follow competitors, hike 
prices (found at www.thechronicalherald.ca)

By ROGER TAYLOR Business Columnist

Tue, Mar 8 - 7:24 AM

We should find out today whether Sobeys Inc. will follow the lead of its competitors and raise food prices in response to inflation. All the signs suggest it will.

In the days leading up to its third-quarter results, out today, the Stellarton-based grocery chain, a wholly owned subsidiary of Empire Co. Ltd., was in a quiet period and could not respond publicly to the suggestion by competitor Loblaws that it’s expected to raise food prices.

In Empire’s second-quarter report, released in December, Sobeys did indicate it was willing to eat rising costs because it couldn’t afford to give up on competitive pricing at that time.

Sobeys president and CEO Bill McEwan told analysts during a conference call: "We have begun to see some commodity price increases but clearly we anticipate considerably more."

He said grocery prices at Sobeys had declined by about one per cent during the second quarter, which ended Oct. 30, 2010.

But since that time, dramatically rising fuel costs have been adding to the demand to raise food prices. That is why it is expected that Sobeys, Canada’s second-largest grocery chain, will re-evaluate the low- price strategy while remaining price competitive in an increasingly tough business.

Sobeys, market leader Loblaws and third place Metro, which together account for about 60 per cent of the Canadian grocery market, have complained in previous quarters that falling retail prices due to stiff competition were taking a toll on profits.

That is why food executives are hopeful consumers will be willing to accept at least some of the price inflation; otherwise, the companies will be forced to continue absorbing the increased costs, which will affect the bottom line.

When contacted for a comment on whether Sobeys believes it will be able to pass along price inflation to the consumer this time around, a company spokesman indicated management could not comment before today’s conference call.

However, I was referred to comments McEwan made at a CIBC World Markets conference in Toronto a couple of weeks ago:

"We remain committed to being price competitive in each market we serve. . . . We are seeing signs of balanced inflation starting, in which retail prices rise in step with manufacturer prices and the general cost of doing business. There appears to be an appetite for that to happen but we shall see. If we behave like a mature industry, it will happen.

"If we continue to pursue business that is not there, we will see continued deflation."

In the parent company’s second quarter, Sobeys reported strong profits despite heavy competition.

The grocery business in Canada is increasingly fragmented. It isn’t only the grocery stores selling food these days. Competition is coming from retail giant Walmart, drug chain Shoppers Drug Mart and even Canadian Tire has been experimenting with selling groceries.

In December, McEwan said he was optimistic the market would soon be in a position to hike prices in line with food inflation.

He also pointed out that some parts of the country have a more competitive retail marketplace than others, so price increases wouldn’t necessarily be felt equally across the country.

In the Toronto marketplace, for example, all companies are engaged in a cutthroat battle to gain market share that means the grocery chains will be watching each other very closely.

While no one wants higher food prices, it is important that Canada maintain a competitive retail food sector. In the end, competition is the best way to safeguard against unfair price rises.

It should be interesting to hear what Empire and Sobeys officials have to say today.

Loyalty Programs: A Defense Against New Competitors

Loyalty Programs: A Defense Against New Competitors 
by Michael Hurwich, President SPMG

Loyalty Programs generally help boost customer retention,

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.

BACKGROUND

COMPANY (A), a dominant force in the high technology industry, was facing the entrance of a new competitor (Company D). At the time, there were two other significant players in the industry, and while (A) enjoyed a 75%+ market share, some customers were showing signs of dissatisfaction. Complaints that (A)’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 Company A. Against this backdrop; (A) began to search for a pricing strategy to defend itself from possible market share erosion while maintaining profitability.

THE DECISION TO LAUNCH A LOYALTY PROGRAM

            

In the search for a defensive pricing strategy, Company A 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 defense against the new competitor, for several reasons.

For starters, a loyalty program would send a strong signal to customers that (A) was prepared to recognize and reward their loyalty in the face of new competition. This was an especially important message to communicate, given (A)‘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 (A) 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 LOYALTY PROGRAM

One of the first steps taken by Company (A) in designing the loyalty program was to hold a brainstorming session with the sales force to determine what products or services offered by (A) 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 (A)‘s breadth of product offerings as key to implementing a successful loyalty program. In essence, (A) was the only significant supplier of a full systems solution, encompassing both hardware and software. By leveraging off this dominant position, (A) management felt it could also promote customer loyalty.

PARAMETERS OF THE RPOGRAM

The program provided customer discounts based on three major criteria:

·         Percentage of (A)’s product bought relative to purchases from the competition

·         Volume purchased of a single product

·         Number of different products purchased.

THE RESULTS

This loyalty program was a tremendous success for Company (A). 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, (A) 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.