Lakshman Krishnamurthi and Purushottam Papatla

Our empirical results suggest that the loyalty-price sensitivity relationship is (a) dynamic (b) heterogeneous across consumers (c) follows a concave or an S-shaped pattern and (d) evolves differently in different categories. We next discuss the managerial implications of each of these findings.

Managerial Implications of the dynamic nature of the relationship

The fact that the relationship between loyalty and price-sensitivity is dynamic, and that price sensitivity progressively reduces with increasing loyalty, suggests that it is inappropriate to define cut-offs to separate loyals from non-loyals, a priori, and have one price or promotional program below the cut off and another above. Such an approach could result in lower profits by offering more promotional price reductions than needed. Instead, managers should have an entire schedule of promotions and offer progressively smaller price promotions as loyalty increases.

Blockbuster is one example of a chain that practices such a strategy. In the first few visits to a store of the chain, the customer receives promotional offers for subsequent rentals of videos and price reductions on other products and services of the store. As the customer is drawn into using the store's products and services either due to the promotions, or due to habituation, however, the variety and depth of promotional offers progressively comes down.

Managerial Implications of the heterogeneity of the relationship across consumers

A second finding of our research is that the size and dynamics of the loyalty-price sensitivity relationship are consumer-specific rather than being uniform across all consumers. In particular, we find that the rate at which price-sensitivity decreases with an increase in loyalty depends on the household's demographics such as income and how busy the head(s) of the household is(are).

As in the case of the first finding above, this suggests that designing loyalty programs on the basis of crude classifications such as loyals and non-loyals is not appropriate. Instead, households that are identified as loyal need to be further divided based on how the loyalty affects their price sensitivity. Promotional programs should then be based on the specific type of relationship that a household exhibits. If, for instance, a household demonstrates a high response level, and rate of response, the promotional program for that household should aim to build loyalty rapidly thereby reducing the need for future promotional price cuts for the household. If, on the other hand, the household has a low response level, as well as a low rate of response, investments in building that household's loyalty should be reduced and promotional incentives should be cut back.

This approach, overall, is in accordance with the spirit of Database Marketing to individualize promotional programs to customers.

Managerial Implications of S-shaped vs. concave response of price sensitivity to increases in loyalty.
An S-shaped response is an indication that any reductions in the price sensitivity, with increases in loyalty, are likely to be small at low levels of loyalty. This, in turn, means that, the time required for the price sensitivity of the customer to fall sufficiently due to loyalty, and the customer to be willing to purchase the product at non-promotional prices and, hence, to become a profitable customer, might be quite long. Managers, therefore, need to take this into consideration in assessing the value of building the loyalty of such households.

A concave shaped response, on the other hand, suggests that reductions in price sensitivity are likely to be rapid with increasing loyalty. The household is therefore likely to reach a stage where it is loyal enough to the brand, to purchase it at regular price, faster than in the case of an S-shaped response. Thus, overall, it might be preferable for the manager to direct any investments in loyalty programs at these types of households than those that exhibit an S-shaped response.

Overall, once again, the implications in this case are similar to those regarding the heterogeneity in the loyalty-price sensitivity relationship across households. Specifically, managers should evaluate each household separately rather than use a one-size-fits-all approach to loyalty and promotional programs.

Managerial implications of variation in the nature of the relationship across product categories.
Whereas the first three findings are related to how the loyalty-price sensitivity relationship varies over time, and across consumers, our fourth finding relates to how it might vary across different product categories. Thus, some categories, such as margarine, are more likely to exhibit an S-shaped response whereas others like liquid detergents would have a concave one. While our analysis does not cover a sufficiently large number of categories to draw conclusions regarding what type of categories we might expect specific types of relationships in, this finding suggests that all categories cannot be treated similarly in the design of loyalty-based promotional programs. Instead, each category needs to be analyzed separately for what the nature of the loyalty-price sensitivity relationship is likely to be so that the most appropriate program for that category can be developed.