Why penalising customer loyalty can impact retention

It’s a shame to see, but some organisations still don’t understand that penalising customer loyalty can impact retention. In today’s competitive world, businesses need to work harder than ever to retain their customers and make sure they keep paying for services or products. It’s widely accepted that customer satisfaction and positive customer experiences lead to longer-term brand loyalty and higher customer retention.

Why is it the case, then, that a recognised Loyalty Penalty remains in certain sectors where long-term customers end up paying over the odds for services? According to Citizens Advice, in 2022 one in seven customers were still paying the loyalty penalty across the broadband, mobile and mortgage markets alone. This equates to a penalty of £1.3bn per year being paid by loyal customers. That’s despite a super complaint being lodged by Citizens Advice in 2018.

Slow strides to reduce customer penalties

It’s clear from these figures that more still needs to be done to properly empower customers. The good news is that, in sectors where such practices were problematic, the last few years have seen progress made on tackling unreasonable automatic price increases and opening up deals to all customers regardless of tenure.

The Financial Conduct Authority has, for example, essentially abolished the loyalty penalty for car and home insurance, by banning price walking and making companies automatically switch their customers to better deals. And it’s great to see that a matter we raised back in 2013 in Loyal Losers, has led to change in the insurance marketplace. However, not all markets have the same regulatory body steering them. This week I experienced a Loyalty Penalty issue which highlights some of the problems that still persist for loyal customers in many markets.

When trying to cancel some App subscriptions, I was offered huge 60%+ discounts to stay; in one case I’d been a customer for many years, in another, I’d only been subscribing for a few months. This got me thinking. If you can afford to offer me this, why was I paying so much for the service in the first place? Wouldn’t it be fairer and more sustainable to rebalance your pricing structure for all customers?

If these companies took time to understand what is motivating their customers’ decisions, rather than seeing price as the be all and end all of the relationship, they’re likely to discover that moving on from their current model would be more profitable in the long run.

Prioritising price over value

When customers try to cancel a subscription, they may be unhappy with one or more aspects of their experience. For example, they may have found a better competitor or realised that they don’t need the service anymore. However, companies may bet that customers will ultimately prioritise price and offer them a huge discount to stay.

The problem is that this puts price over value. It also suggests that customer satisfaction is not as important as keeping them paying – a complete antithesis to the principles of customer engagement and experience that organisations should adhere to.

The fact that these discounts are given so easily is a cynical organisational approach. It demonstrates how little trust and worth such businesses place in their customers. It also encourages ‘bad’ behaviour on the part of customers themselves, some of whom will pretend they want to cancel just to get the chance to speak to the retentions team.

Manipulation of customers in this way is not healthy for building long-term relationships, for brand loyalty or for reputation.

Cheaper doesn’t equal better

It’s important to remember that a cheaper but substandard service is still substandard. While some customers may choose the cheaper option, they may not necessarily be happy with it in the long term. This approach often leads to customers leaving once they find a better deal from a competitor.

Industry reputation is also at stake (as is clearly shown through the media) when organisations prioritise price over customers, leading to a distorted market. For example, if a competitor provides a better service but charges more than a company that keeps offering discounts to retain customers, it can be difficult for the competitor to operate properly. Distorting the market in this way is neither good for the competitive landscape nor for the customers they serve.

Loyalty should reap huge rewards – on both sides

While offering big discounts to encourage customers to stay may seem like a good idea, the negative consequences can have much deeper repercussions for businesses and customers alike.

Putting price over value leads to cynicism and distrust among customers. In the long term, this approach to ‘retaining’ customers is counter-intuitive, reducing loyalty, increasing customer dissatisfaction and damaging market reputation.

It’s been proven time and again across sectors and markets that building long-term, profitable customer relationships is not based on price. It’s based on an organisation’s ability to focus on customer satisfaction by listening to, understanding and meeting customers’ needs and expectations when shaping product or service policies.

As well as fair pricing, this means looking closely at what really engages customers and what factors are most critical in driving satisfaction, loyalty and customer retention.

The chances are this won’t be a 60% price reduction – so, dear App provider, you might want to think again.


Article written by Kirsty Potter, Research Director

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