Why do existing customers not get the best offers?
We’ve all been there. You see an advertisement from your bank or internet provider, and it sounds better than what you already have as a current customer. You stroll into the local office to get them to match the offer, and the associate says, “That’s only for new customers.”
Naturally, you leave the office elated that you left without the same offer, right? Probably not. Like most people, you probably got upset and started mouthing off about “I’ve been a customer here for 20 years…” or “So much for loyalty!” or some other uplifting comment. You probably even told a few of your friends to leave that business immediately because they don’t care about their customers.
Why do companies do this? My purpose in this post is to answer this question from the company’s perspective. I’m doing this because if the customer(you) can see what’s happening and why, then you’re less likely to blow up and rant about how awful the company is if you can appreciate the other side of the aisle.
So, let’s dive into the company’s point of view.
First, why do companies offer new customer promotions? To get new customers! Every business needs a steady flow of new customers to operate. The company is hoping to bring in some new people with an enticing offer. The company then hopes a certain percentage of these new customers will decide to hang around after the offer expires. It’s a numbers game and the company thinks they can win the game with the new offer. This is also why you commonly see a referral-based incentive offered by companies—because it’s so much more cost effective compared to advertising.
Now for the big question: why do existing customers not automatically get those same offers? Let’s start by looking at this from the perspective of a bank. Let’s say you are the bank, and you have a million dollars in deposits that you are paying 1% interest to keep. All of a sudden, every household represented in that million dollars calls you and wants to get paid 4% interest for that money. Now, the money that used to cost you $10,000 would suddenly cost you $40,000 even with nothing else changing. That’s an expense increase of 300%, or $30,000, for basically no reason other than to keep the deposits from leaving. If your business exists to make a profit and minimize expenses, would you go looking for an extra $30,000 in expenses with no benefit to you? Probably not. As it turns out, neither do banks. They don’t want their “cost of deposits” to increase if they don’t have to. And yes, it does cost the bank something to keep deposits on hand. It isn’t completely cost-free. Granted, they are making money by loaning out those deposits to borrowers, but don’t believe the myth that there are zero expenses associated with the deposits held by banks.
Banks are one common example, but what if we used an internet provide? Let’s say you are an IP and you have 100 customers who pay you $100/mo for internet. That means you’re making $10,000/mo income from these customers. One day they all call you and want to pay $50/mo instead of $100/mo. If you switch all of them over, your income is cut in half. Remember, these are customers you already had on the books. So, you have a business decision to make: do you cut your income by half? Or do you refuse and risk losing half or all your income anyway? Or do you offer a rate somewhere between $50-$100? As it turns out, most businesses opt to go with option 3 and offer a different rate. Again, it’s a game of numbers. The special balance the business is trying to strike is to keep existing customers happy and bring in new customers and make it a win/win.
Scenario of being a landlord (this is detailed, but provides a thorough explanation and comparison to what we’re discussing)
I’ll put it to you another way. Let’s say you are a landlord who owns 4 rental properties. 3 of the properties are being rented on a month-to-month basis for $1500/mo, and the 4th property is vacant. You haven’t had any luck renting the vacant property, so you decide to advertise a promotion: First 6 months at $1000/mo! Within a week, you have a tenant who signs a 12-month lease. The first six months are $1000, and the remainder is set at $1600/mo. Your new tenant income for the year will be $15,600.
Your existing tenants are projected to bring you $18,000 in annual income, each. They get wind of your promotion and demand you lower their rent to $1,000 to match your incentive to fill your vacant property. If you matched the offer exactly, then the 3 of them would provide $15,600 in rental income as well. You basically have the same 3 options as before: match the rate, refuse the rate and risk losing 1 or more of your tenants, or offer a different reduced rate and keep your tenants without as much loss to your bottom line.
Think about this scenario as the landlord/business owner. Would you not weigh your options to make everyone happy while simultaneously maximizing your profits? That’s why you’re in business—to make a profit. That’s why every business in existence is in business(except for non-for-profits).
So, how would this play out? If you take option 1, your income from the 3 properties goes from $54,000 to $46,800, resulting in a loss of $7,200. The good news is you still have $46,800 in rental income instead of potentially zero.
If you take option 2, let’s say 1 of the tenants moves out and it takes you 3 months to find a new tenant. Your other 2 tenants stay, but they are upset. That means for 3 months your income is $3000/mo instead of $4500/mo, so you lost a total of $4500($1500x3mos). You get a new tenant and your income is back on track to $4500/mo from those 3 houses. There are lots of variables that could happen after 3 months: did the other 2 tenants work on finding a new place during that time and find one in month 4 and now you’re out 2 tenants instead of 1? Did you need to offer the same incentive to fill the house of the 1 tenant who left originally? If the other 2 tenants left in month 4, do you need to offer the same incentive to fill those two houses in month 5? You can get the sense that the variables can add up quickly, making it difficult to project your total income for the year.
In option 3, you have a chance to eliminate a lot of the variables of option 2, plus make more money than option 1. Let’s say you offer your 3 tenants a 6-month rate of $1300/mo to stay which will then increase back to $1600 in month 7. They like this option because they still get a reduced rate, and it beats all the hassles of moving. If this all plays out smoothly, you’ll have all 4 tenants during the full 12-month cycle. Plus, you’ll end up with an income of $52,200 instead of $46,800 in option 1. You get more income, less hassle, less variables, and keep all your tenants. Doesn’t this sound like a good option as a landlord?
Wrapping it up
I hope you can see the many similarities between my last example and what you face as a customer with many businesses. Businesses aren’t offering their best rates to everyone because that results in a loss of income. Will they still lose some customers? Sure. But they won’t lose enough to offset their expected gains from the new customer promotion. There needs to be a win/win scenario. Giving the best possible rate to everybody is a win for the customer, but not the business. If the business isn’t profitable, it shuts its doors! Never offering a special rate to customers might be a win for the business, but never to the customer. It’s risky. Most businesses are prepared for a third win/win scenario: get new customers on one rate, and keep existing customers on a different rate.
So, before you get up in arms about how the business doesn’t believe in customer loyalty, think about it from the business owner’s perspective. Does it make business sense to drastically cut your income overnight? Would it be better to try and incentivize new customers to come to your business and wait and see how it plays out with your existing customers? If you still think a business should sacrifice income just to offer everyone the same rate, then you don’t understand why anyone would start a business in the first place. Businesses exist to make money. Period. It may not sound customer-centric, but that’s the nature of the system. Take a moment and be grateful that every business you need in your life still makes a profit and can keep its doors open so you get to continue to enjoy your product.
*note: Of course, I have certainly been known to call my internet provider whenever my offer expires and demand they give me a new one. Sometimes, threatening to leave is the best way to get it, or quote a competitor's rate.