CHICAGO, April 15, 2014 /PRNewswire-USNewswire/ -- Offering important customers added "perks" is widely-thought to increase firm profitability. New research confirms anecdotal reports that doing so may have just the opposite effect.

Customer prioritization programs (e.g., loyalty programs) are becoming ever prevalent. Such programs focus firms' resources on their most important customers and are expected to improve profitability by encouraging customers to purchase more and more frequently from the firm. But why does anecdotal evidence often tell another story?

Hauke Wetzel and Maik Hammerschmidt from the University of Goettingen in Germany and Alex Zablah from George Mason University provide an initial answer to this question in a study published in the March 2014 issue of the American Marketing Association's Journal of Marketing.

The research team finds that while prioritization enhances sales and profits, it also destroys profitability through a disproportionate increase in service costs. These off-setting effects led the research team to dub customer prioritization a "double-edged sword." Wetzel explains that while customer purchase volumes increase in response to the added benefits received, prioritization also signals to customers that they are relatively important to the firm and thus triggers entitled behaviors that result in an "explosion" of customer service costs.

Hammerschmidt and Zablah further explain that the type of benefits a firm provides its important customers determines whether prioritization helps or hurts. If prioritization programs focus on ensuring that the firm's products tightly match a customer's needs, prioritization's undesirable effects are mostly negligible. However, if firms focus on providing customers with symbolic benefits, like labeling them a "VIP customer," entitled behaviors become more prevalent because customers perceive they are somehow superior or more important than other customers. This perceived superiority leads them to demand "royal treatment for value meal prices," adds Wetzel. Contrary to popular belief, the study also reveals that prioritization's harmful effects are accentuated when customers are made aware of the scheme used to award the added benefits because doing so reinforces customers' belief that their loyal behaviors have earned them the right to demand more.

Given their findings, the authors contend that for prioritization programs to maximize profitability, the focus should be on benefits that are largely "silent" about customers' relative status within the firm (e.g., volume discounts). In contrast, prioritization benefits that signal a customer's relative importance to the firm should be used sparingly and only when the goal is to remind customers that they are indeed valued.

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SOURCE American Marketing Association