Is price a loyalty tool?

It is increasingly common to find loyalty programs in categories where they did not exist before: fast food, clothing, telecommunications services, veterinary clinics, and even construction materials. And each of these programs offers different types of benefits to guarantee customer loyalty, such as raffles, discounts, free products, etc. This article does not intend to be a treatise on loyalty strategies, but rather to analyze the specific case of those programs that use price as the main reward benefit, thus affecting the company’s pricing strategy.

Discounts as a benefit
Let’s first examine what happens when the benefits of a loyalty program are based on discounts or special prices. Cinemark Colombia, like the other movie theater chains in the country, began some time ago to promote its Elite loyalty program as an effort to increase auditorium occupancy. The main benefit obtained by a customer registered in this program is access to special ticket prices. These prices change every month, but can be up to 40% lower than the regular price. To obtain the Elite card, the customer must fill out a simple online form. Then, on their next visit to the cinema, they can pick it up for free at the theater box office. Just like that. Since there were initially few Elite members, there were even special lines to buy tickets and concessions. However, attracted by the low prices and the few requirements to obtain them, more and more members joined to the point where the Elite lines were longer than the regular ones. Obviously it didn’t take long before the special lines disappeared.

This situation experienced by Cinemark Colombia highlights two of the main problems that arise when a loyalty strategy attempts to function as a pricing strategy. On one hand, it shows that when the conditions required to obtain a higher discount are very easy to meet, the company ends up “selling cheap to everyone.” A correct segmented pricing strategy is one that offers discounts only to customers who are highly price-sensitive and avoids “leaving money on the table” with less sensitive customers. The Elite card, and therefore the special prices, are very easy to obtain. There are even situations in which members of the same family lend the card to each other, or cases in which children fill out the forms for their parents who do not know how to use the internet.

On the other hand, a loyalty program like Cinemark Colombia’s increases the price sensitivity of its customers. An Elite client becomes accustomed to movie tickets being much cheaper than the regular price. Thus, when special prices increase in a given month, they are perceived as “expensive” by an average customer who has been paying less for a long time.

Benefits that do not increase price sensitivity
Let’s now look at a typical case of a loyalty program whose benefits have nothing to do with discounts or special prices. Frequent flyer programs in most airlines are an excellent example of how to generate customer loyalty without needing to sell cheaper. These programs are based on two types of benefits: superior service (access to VIP lounges, priority service, priority baggage handling, class upgrades, etc.) and ticket redemption. But doesn’t redeeming tickets amount to giving a 100% discount? In theory yes, but in practice the redemption of miles does not contaminate the company’s pricing strategy at all. A ticket with a 50% discount lowers the reference price of the service in the consumer’s mind, thus increasing their price sensitivity. But a free ticket does not have that impact on the reference price or on the level of price sensitivity of the customer. This is why, from the perspective of pricing strategy integrity, it is better to give away products than to offer them at a discount in a loyalty program.

In summary...
Loyalty programs are important within a company’s marketing strategy to maintain and even increase customer value over time. However, it is necessary to ensure that their structure does not interfere with the pricing strategy. A benefits plan based on discounts and special prices can increase customers’ price sensitivity, affecting revenues in the medium and long term. Finally, it is necessary to keep in mind that the value-based segmentation used in loyalty programs does not necessarily coincide with the segments considered in the design and implementation of a pricing strategy focused on profitability. To avoid problems, try not to offer discounts as a benefit in your loyalty programs.