Saturday, November 10, 2007

Customer Service and the Explanation for Corporate Stupidity

Moolanomy wrote an excellent post yesterday about how companies give preferential treatment and pricing to new customers, over the their long time loyal customers. That's exactly right.

There is an economic reason for this strategy, but sometimes it backfires. Recruiting new customers is difficult and expensive. To succeed companies must offer new customers something that their existing provider is not giving them. After all, why would you switch to a new provider if you would be getting exactly the same price and service? However, extending these promotions to the company's entire customer base can be a very expensive proposition for the company. For example, Comcast keeps coming out with teaser offers that essentially cut digital cable prices in half for new customers for six months. If they halved the price for their entire customer base, they may gain a bucket load of new customers, but the overall impact on their profitability would be devastating.

This strategy sometimes backfires with individual customers. One of my colleagues at work was a long time Comcast cable customer. One day he received in the mail one of those promotional rate offers and called Comcast asking them to extend him the same promotional offer. They refused since he was already a customer. He threatened to move to AT&T which has been aggressively promoting their services in our area, and which also offers aggressive introductory prices. They still refused.

Reluctantly, my friend moved to AT&T and got their six month promotional rate. When that rate expired, he moved back to Comcast and... received the new customer promotional rate. That outcome clearly did not make sense for Comcast. Comcast lost a customer for six months, and when he came back, he still got the promotional rate. Wouldn't it have been more profitable to retain him as a customer over the entire period? Of course it would have been. However, companies are banking on customer procrastination, laziness or ignorance to make this strategy work.

The vast majority of customers simply don't call to ask for a better deal. Of those that do, and are refused, a large majority still continues the service without receiving the discount. On average, the company makes more money by refusing to reduce prices for its existing customers than it would be by reducing prices to try to retain existing customers, such as my colleague. I guess they are not that stupid after all.


Pinyo said...

Shadox, great follow up post.

Yeah, in a way, I must admit that it's hard for these companies too -- damn if they do it, damn if they don't.

As consumers, it's surprising how much money we can save by calling once in a while to see who can offer us the best services at the best value.

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