Customer prioritization (or loyalty) programs are common in the business world and continue to grow in popularity. Such programs, which focus firms' resources on the most important customers, are widely- believed to increase firm profitability by enhancing customer loyalty and retention.
Given their beneficial effects, business-to-business firms (e.g., government contractors) and business-to-consumer firms (e.g., airlines) use prioritization as a way of ensuring that their "top tier" customers receive incremental benefits and special treatment in return for their loyalty to the firm. But is there a dark side to this practice?
Alex Zablah, associate professor of marketing at George Mason University's School of Management, and his co-authors Hauke Wetzel and Maik Hammerschmidt from the University of Goettingen, examine loyalty programs' potential dark side. The research team finds that managers should view prioritization programs as a double-edged sword. That is, their research confirms that while prioritization can enhance sales and profit, it can also reduce profitability by increasing service costs.
"This dark side results because prioritization signals to customers that they are very important to the firm, and this leads them to feel entitled to demand more from their exchange partners," explains Zablah. "Ultimately, entitlement-driven customer behaviors undercut profitability by increasing firms' cost to service their relationships with customers."
The research team conducted two different studies to examine the effects of prioritization on customer profitability in business-to-business markets. The results were remarkably similar across both studies and strongly confirmed the negative effects that can accompany prioritization programs. The research also revealed that the negative effects are more likely to result when firms use certain types of tactics.
"If firms focus their prioritization efforts on ensuring a good match between customers' needs and the products they buy, then dark side effects are negligible," says Zablah.
He cautions, however, that if firms focus on providing customers with symbolic benefits, like labeling them as 'VIP,' the dark side tends to become more pronounced because customers are alerted to the fact that they are considered more important to the firm than other customers.
"Contrary to popular belief, sharing prioritization schemes with customers can backfire for firms," Zablah adds.
Specifically, his research demonstrates that when customer priority levels are assigned based on past purchases, making customers aware of the firm's prioritization scheme (e.g., in a B2B scenario, top priority customers are those with purchases in excess of $1 million) actually accentuates the dark side because customers grow to perceive that their loyal buying behaviors entitle them to demand more from the firm.
Given their findings, Zablah contends that for prioritization programs to maximize profitability, any exclusive benefits provided to top-tier customers should be offered sparingly, to reinforce that they are valued by the firm while not contributing to heightened expectations.
"My colleagues and I are very excited about this study because it provides managers with useful guidance regarding how to structure prioritization programs and offers a cautionary tale about why common prioritization practices may actually hurt profitability," says Zablah. "We hope and expect this research is going to have a big impact in terms of how managers think about prioritization and loyalty programs."
Alex R. Zablah joined the School of Management's faculty in May 2012, after serving as Assistant and Associate Professor of Marketing at the Spears School of Business, Oklahoma State University. His research explores managerially-oriented questions within the marketing strategy domain; his primary area of expertise is on the customer-employee interface in sales and service contexts. He also has expertise and research interests in the areas of innovation, business-to-business branding, and the modeling of multilevel and growth data. Learn more about Professor Zablah.