The Hazards of Hounding

Companies aggressively offer discounts, introductory coupons, and other incentives to lure new customers—and, often, those prospects oblige by making an initial purchase. But my research in the financial services, fast food, and automotive sales and service industries shows how these tactics can backfire. In one study, involving 300 new customers of a bank, 71% of respondents felt that the bank had induced them to join. I call these members the bank’s firm-determined customers. By contrast, only 29% were self-determined, believing that they had joined the bank on their own initiative. A year later, the self-determined customers were twice as profitable as the firm-determined customers—and were 80% less likely to have defected from the bank. Similarly, in another study, I found that self-determined customers of a delicatessen were more loyal than firm-determined customers and that they gave the store a greater share of their fast-food wallets. Aggressive, incentive-driven acquisition marketing may attract new customers, but often those customers are myopically focused on the offer instead of interested in cultivating a long-term relationship with the company. Worse, this high-pressure approach may turn off the loyal self-determined customers whom companies want to keep. In a field experiment in an automotive sales-and-services firm, I found that self-determined customers who were sent reminder coupons to encourage repeat purchases came back less often, spent less on each visit, and were more likely to defect during the next three years than customers who were not given any incentives to return. So how do you market to desirable customers who are hostile to the usual aggressive incentives? Try offering incentives that reinforce their decision to patronize your company, such as a package of benefits that reward the continuing relationship. One bank, for example, offered rewards such as better interest rates, reduced or eliminated fees for various services, and free investment advice for maintaining high balances. A year later, the profit from the bank’s self-determined customers had grown by 25% and the defection rate had dropped by more than 50%. Interestingly, comparable firm-determined customers did not react as favorably to these rewards, showing no increase in profitability and little reduction in defection rates. (To market to self-determined customers, of course, you have to find them. One way is to simply ask customers why they started patronizing the company in the first place. Another is to identify those who paid full price for products at the outset, instead of reacting to promotional offers.) To attract new self-determined customers, strengthen your brand-building programs, such as image and informational advertising, and avoid aggressive recruiting. Although the impact of brand programs is relatively hard to measure, the customers they attract are, in the long run, the ones you want most.

The Hazards of Hounding

Partner Center