The Pitfalls of Reinforcement answers
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McMaster University *
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Information Systems
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Feb 20, 2024
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The Pitfalls of Reinforcement
Improvements in database technology mean that it is now easier than ever before for marketers to track the behavior of their customers. Frequent purchasers can be tagged with special codes and rewarded for their desirable behavior. In the banking services market, this might mean providing profitable customers with faster and better service when they contact the bank or offering them special upgrades, discounts and fee waivers that are unavailable to regular customers. The flip side of a reward system like this implies that “lesser” customers receive a lower quality of service. For example, a highly profitable customer might have his or her call about investments answered within 15 seconds, while less attractive prospects are automatically routed to the “hold” function. Web site pages that can be accessed by better bank patrons might be made unavailable to regular customers. What are the advantages of creating a reward system that is based entirely on the measurement of past behavior?
Reward biggest and best customers, keep them loyal and happy
Further penetration with most profitable target
80/20 rule (80% of business comes from 20% of your customers)
Easy to track behavior and predict
Less expensive, often, to keep existing customers than trying to find new ones
What are the disadvantages?
Does nothing to shape behavior of currently less profitable customers
It is backward looking: forecasting based only on past behavior is like driving down the highway looking in your rear view mirror
People might not keep doing the same things
What if less favoured customers find out about the service difference (could be negative WOM, might leave you)
What about the future? What if you put off people who could be good customers one day?
Use phone company analogy: Some of you must be on phone plans where you went for a good offer and got locked in. Then an even better offer came out but the phone company wouldn’t do anything to your contract.
What about RBC offering an iPad to people who switch to them? What if you are a current loyal customer – why aren’t you getting one?
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