In many markets it is hard to make customers loyal, so few can be described as being ‘our‘ customers. Many coffee store users certainly do not use a single store in their locality exclusively, but visit two or more interchangeably. These people constitute an additional population to those shown in Briefings 50-52—disloyal customers. They may reach that state from the start, following the sequence of behaviors described in the choice pipeline of Briefing 40, from where it may be possible for a store to capture their loyalty. Alternatively, they may be so satisfied with the first store they use that they remain loyal for a time, only to be lost into the disloyal state at a later date. Competitors face a tough challenge with disloyal customers because their habit of frequent switching means that their choice must be competed for on every purchase occasion.
Figure 1: Type-3 rivalry for visits and spend by disloyal coffee store customers. (Click image to view larger)
In Figure 1, customers behave differently, only becoming disloyal, and doing so at a rate that reflects the best value for money offered by either of the two stores. As in Briefing 52 the competitor’s price is $2.80 for the first half of the year, and ours is $2.80 for the second half, so one store or the other offers good value throughout the year. Consequently, the number of active customers grows strongly. For the first half-year, the competitor offers better value, so although our price of $2.95 is acceptable we only receive one-third of customer visits, although those customers do spend the normal amount of $5.00. However, this is not enough, even with the growth of total demand, to generate sufficient sales for our store to become profitable. Our rival enjoys two-thirds of customer visits and their better-than-acceptable price of $2.80 drives sales of $5.27 per visit. Consequently they break into profit after just a few months.
For the second half year, the situation reverses as our competitor raises its price to $3.15 and we drop ours to $2.80. It is unlikely in reality for a competitor to be so foolish as to persist with such a pricing policy if the consequences for customer visits and spend were so clearly harmful. Note also that if we had gone along with the competitor from week 26 and also charged $3.15, customer development would have stopped completely, and any higher price would have seen many customers leave the market altogether.
Until next time…
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When type-3 rivalry is (nearly) impossible
In some markets, type-3 rivalry is to all practical purposes impossible. Few consumers, for example, buy power or water from more than one supplier. Durable products also make type-3 rivalry impossible, and in extreme cases type-2 also. For example, you buy a swimming pool so rarely that switching between suppliers is meaningless, as is ‘disloyal‘ purchase decisions. You also cannot share your purchase of a car or a TV between more than one supplier.
This briefing summarises material from chapter 7 of Strategic Management Dynamics, pages 440-443.
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