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The Customer Loyalty Game

I'm very loyal to my favorite brands. I buy both my morning cup of joe and my beans at Phoenix Coffee. I recommend a Great Lakes beer whenever someone ask for a tip on a microbrew. When I travel it's almost always on Southwest Airlines (I also tip my hat to JetBlue, but without service to Cleveland, I don't get many opportunities to travel with them). When I visit a business I don't like I don't demand a refund or write a complaint to the manager or go and whine on a blog (although I do occasionally write reviews on Yelp); I simply stop patronizing the business. When I find a business I like, I give them my business and I tell my friends to give them their business too.

Not everyone behaves like this. When friends tell me about a business trip or a vacation, I usually ask what airline they flew on. The answer is often, "I don't remember. Whoever was the cheapest."

I was once an avid reader of The Consumerist blog, but I've since become disgusted with much of their content. Yes, there are instances in which customers are legitimately cheated by the companies they trusted; but often the blog is filled with petty whining and one-sided accounts of incidents that anyone who has actually worked at a company and dealt with customers will tell you only vaguely reflects reality. To me, it all begs a bigger question: in competitive markets, why do people do business with bad companies? And why do bad companies act like jerks toward their customers?

I think the answer can be found in this game theory matrix:

Bad companies treat customers poorly because it's the strategy that is most effective to achieve a strong bottom line, so long as their customers aren't band-loyal and they just go after the "cheapest" or the "most convenient" or whatever. On the other hand, some businesses do treat their customers very well because they know it will yield significant returns.

But wait, you might look at this matrix and say that it looks like an example of a coordination game, except that the outcomes in many cases are more like a prisoner's dilemma... What gives?

The first answer is that "customers" as a group do not represent a single player in this game. Some customers may be highly brand-loyal, others may not. Some firms know they can do just fine by picking the unfriendly strategy because many of their customers are already set on the no-loyalty strategy.

The second answer is that external factors impact players' strategy. Maybe some people love shopping for groceries at Whole Foods, but they don't earn much money and they have a whole family to feed, so they shop at WalMart, hating every trip they make there, because it's all they can afford. In this case, customers are not consciously brand loyal, but they consistently take their business to the same places and the businesses respond with a predictable strategy.

I will continue to be brand loyal. If more customers became brand loyal, I believe more businesses would be pleasant places to be a customer. Isn't that what we all ultimately want, anyway?

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