Customer loyalty programs are attempts to bond customers to a company

Question

Customer loyalty programs are attempts to bond customers to a company and its products and services by offering incentives—such as airline frequent flyer programs or special credit cards with valuable benefits-to loyal customers. In support of loyalty programs, companies often invoke the “80/20” principle, which states that about 80 percent of revenue typically comes from only about 20 percent of customers. However, this profitable 20 percent are not necessarily loyal buyers, especially in the sense of exclusive loyalty. Studies have demonstrated that only about 10 percent of buyers for many types of frequently purchased consumer goods are 100 percent loyal to a particular brand over a one-year period. Moreover, 100-percent-loyal buyers tend to be light buyers of the product or service. “Divided loyalty” better describes actual consumer behavior, since customers typically vary the brands they buy. The reasons for this behavior are fairly straightforward: people buy different brands for different occasions or for variety, or a brand may be the only one in stock or may offer better value because of a special deal. Most buyers who change brands are not lost forever; usually, they are heavy consumers who simply prefer to buy a number of brands. Such multi-brand loyalty means that one company’s most profitable customers will probably be its competitors’ most profitable customers as well.

Still, advocates of loyalty programs contend that such programs are beneficial because the costs of serving highly loyal customers are lower, and because such loyal customers are less price sensitive than other customers. It is true that when there are start-up costs, such as credit checks, involved in serving a new customer, the costs exceed those of serving a repeat customer. However, it is not at all clear why the costs of serving a highly loyal customer should in principle be different from those of serving any other type of repeat customer. The key variables driving cost are size and type of order, special versus standard order, and so on, not high-loyalty versus divided-loyalty customers. As for price sensitivity, highly loyal customers may in fact come to expect a price discount as a reward for their loyalty.

Still, advocates of loyalty programs contend that such programs are beneficial because the costs of serving highly loyal customers are lower, and because such loyal customers are less price sensitive than other customers. It is true that when there are start-up costs, such as credit checks, involved in serving a new customer, the costs exceed those of serving a repeat customer. However, it is not at all clear why the costs of serving a highly loyal customer should in principle be different from those of serving any other type of repeat customer. The key variables driving cost are size and type of order, special versus standard order, and so on, not high-loyalty versus divided-loyalty customers. As for price sensitivity, highly loyal customers may in fact come to expect a price discount as a reward for their loyalty.   1 
VCR000108-01
 1. The primary purpose of the passage is to

A. question the notion that customer loyalty programs are beneficial 
B. examine the reasons why many customers buy multiple brands of products 
C. propose some possible alternatives to customer loyalty programs 
D. demonstrate that most customers are not completely loyal to any one brand of product or service 
E. compare the benefits of customer loyalty programs with those of other types of purchase incentive programs

2 
 2. The passage mentions each of the following as a potential reason for customers' divided loyalty EXCEPT

A. A particular brand may be the only one available
B. A particular brand may be offered at a discount
C. Customers will often buy multiple brands out of a desire for variety
D. Customers will often buy a unfamiliar brand when it is new on the market
E. Customers will often buy certain brands for certain occasions

3 
 VCR000108-03 
 3. According to the passage, advocates of the customer loyalty programs claim which of the following about highly loyal customers?

A. They often expect price discounts a reward for their loyalty to the product
B. They can be served at lower expense to a company than nonloyal customers
C. They tend to be light but predictable buyers of the product or service in question
D. They are unlikely to try out new brands or products that appear on the market
E. They are difficult to differentiate statistically from other types of repeat customers

4 
 4. The passage suggests that companies that invoke the "80/20" principle in customer loyalty programs believe which of the following?

A. A well designed customer loyalty program can increase the number of company's loyal customers by as much as 80 percent.
B. About 20 percent of any given company's most profitable customers are likely to be its competitors' most profitable customers as well.
C. It is unreasonable to expect more than 20 percent of customers to be 100 percent loyal to any particular brand of the product.
D. Even "loyal" customers cannot reasonably be expected to stick to one particular brand of product more than 80% of the time.
E. A relatively small number of loyal customers is responsible for about 80% of the company's profits.

5 
 5. The second paragraph functions primarily to

A. propose solutions to certain problems inherent in customer loyalty programs.
B. emphasize certain risks inherent in customer loyalty programs.
C. address certain contentions put forth by advocates of customer loyalty programs.
D. defend certain specific aspects of customer loyalty programs against criticism.
E. reconcile competing view points regarding the efficacy of customer loyalty program.

6 
ID 00108
 6. The author of the passage suggests that which of the following is most likely to be true of a customer who is exclusively loyal to a particular brand of product?

A. The customer probably began buying that brand of product only within the past year.
B. The customer is probably among the most profitable customers for the company that manufactures that brand of product.
C. The customer is probably not a heavy consumer of that particular type of product.
D. The customer is probably a loyal customer when purchasing other types of products as well.
E. The customer probably sampled numerous brands of that type of product before becoming loyal to a particular brand.

GMATNinja · Accepted Answer

The passage does indeed state that "one company’s most profitable customers will probably be its competitors’ most profitable customers as well."

However, that information is not relevant to this question. This question specifically asks about the "80/20" principle in customer loyalty programs, "which states that about 80 percent of revenue typically comes from only about 20 percent of customers." Companies that believe in the 80/20 principle  believe  that most of their revenue (and, hence, most of their profits) come from a relatively small number of loyal customers.

(E) is thus the best answer.

Even if you don't quite understand the meaning of "reconcile" here, the second paragraph doesn't describe  competing view points .

If we were given two competing view points, to "reconcile" them would be to make them consistent. For example, that might entail explaining how the two views actually share fundamental similarities despite apparent differences. Or that might entail describing inaccurate facts/assumptions taken by one or both of those views and then showing that, given the same facts/assumptions, the two different views would actual agree with one another.

Put simple, to reconcile two views is to make them both make sense given the facts.

Choice (C) is a much better answer here.

I hope that helps!

GMATNinja · Answer

"Advocates of customer loyalty programs" are people who believe that these programs are  beneficial  to a brand. The first sentence of the second paragraph tells us why these advocates believe this:
 
So, advocates believe that the programs are beneficial for two reasons: 1) it costs less to serve a highly loyal customer than a less loyal customer, and 2) loyal customers are less price sensitive than other customers. "Less price sensitive" means that these customers will still buy their preferred brand even if the price of the product changes.

The rest of the second paragraph (including the sentence that you included in your analysis) actually contains the author's argument  against  these supposed benefits of a costumer loyalty program. First, he/she explains that the cost of serving a loyal costumer is not that different than the cost of serving a new customer. Then he/she argues that instead of being less price sensitive than other customers, people enrolled in a loyalty program expect lower prices as a reward. In other words, they become  more  price sensitive than they would be without the loyalty program.

Let's take a look at (A):
 
From the above analysis, we can see that this is an argument  against  the position of loyalty program advocates. Eliminate (A).

Now look at (B):
 
This closely mirrors the advocates' argument in the first sentence of the second paragraph: "such programs are beneficial because the costs of serving highly loyal customers are lower." (B) is the correct answer for question #3.

I hope that helps!

mbaapplicant2019 · Answer

What does 5 question, E option mean ?

TaN1213 · Answer

Q6 is based on the following excerpt from passage: " Moreover, 100-percent-loyal buyers tend to be light buyers of the product or service ."

Q5 The second paragraph functions primarily to

The last line of P1 ( Such multi-brand loyalty means that one company’s most profitable customers will probably be its competitors’ most profitable customers as well. ) raises questions on the loyalty of very-loyal customers.
The first sentence of P2 expresses the  disagreement  of the advocates of loyalty programs stating that even though very-loyal customers may be involved with the competitors, such customers are beneficial because of reason X. 
Further, the author addresses these disagreements(contentions) expressing his doubts on reason X. (address= lecture/discuss)

AliciaSierra · Answer

Dear Expert,

Could you please explain question 4. Following is last sentence of 1st paragraph.

Such multi-brand loyalty means that one company???s most profitable customers will probably be its competitors??? most profitable customers as well. .

As per above lines, i thought answer to question 4 is B.

But OA is E. I find B and E both correct. Could you pls let me know how should i select E over B.

Regards,
Amm

Will2020 · Answer

GMATNinja  In question 3, why answer choice A is wrong? At the end of the last paragraph is written that "As for price sensitivity, highly loyal customers may in fact come to expect a price discount as a reward for their loyalty." So, isn't it what advocates of customers loyalty program saying? Many tks!

lakshya14 · Answer

Can we conclude that revenue is equal to profit? I got confused by this only.

GMATNinja · Answer

Profit and revenue definitely aren’t the same thing, and we can’t say they are  equal . But in the context of the passage, it’s fair to say that if certain customers account for  about  80% of revenue, they account for  approximately  80% of profit. (E) simply states that loyal customers are responsible for  about  80% of the company’s profits. So, it’s fair to say that the passage  suggests  (E).

I hope that helps!

Hoozan · Answer

Vinit800HBS   KarishmaB   GMATNinja

6. The author of the passage suggests that which of the following is most likely to be true of a customer who is exclusively loyal to a particular brand of product?

Reading the above why can't (A) be the answer

On the other hand (C) says "The customer is probably  not a heavy consumer  of that particular type of product." BUT the passage says

The passage says that the loyal consumers are light buyers, not light consumers. We could very well have a situation such that customer X doesn't buy a lot of product A rather he consumes more of it from his friends and family who purchase the product. To make option (A) correct aren't we assuming light buyer = light consumer. And that, I believe, is a big leap!

KarishmaB · Answer

Studies have demonstrated that only about 10 percent of buyers for many types of frequently purchased consumer goods are 100 percent loyal to a particular brand over a one-year period. Moreover, 100-percent-loyal buyers tend to be light buyers of the product or service.

6. The author of the passage suggests that which of the following is most likely to be true of a customer who is exclusively loyal to a particular brand of product?

A. The customer probably began buying that brand of product only within the past year.

Not correct. How do you define "loyalty"? When do you say that a customer is loyal? When he buys from the same company 5 consecutive times? When he buys from the same company for a month? When he buys from the same company for a year? 
The point is that "Studies show that only 10% of buyers are 100% loyal to a particular brand" doesn't make sense on its own. When do we say a buyer is 100% loyal? Is it that he should've never bought that product from any other company? So we need to give a timeline. The study perhaps surveyed people and asked them about their purchase for the last year. Those who bought only from the same company for the whole year were called 100% loyal. Does it mean they started buying from this company one year ago? No. Some may have been buying for 5 years, some 10 years, some 2 years... we don't know. We will call them 100% loyal if in the past year they have bought only from this company. That is all it means.

C. The customer is probably not a heavy consumer of that particular type of product.

Correct. We do not make a distinction between buyer and consumer until and unless the passage/argument requires us to. The buyer is the consumer even if he buys to gift the product to someone else. The one who bought is the one who paid for it and led to the consumption of the product. Whether he himself used it to or gave it away to someone else doesn't matter. This person led to the consumption of the product.

KarishmaB · Answer

4. The passage suggests that companies that invoke the "80/20" principle in customer loyalty programs believe which of the following?

A. A well designed customer loyalty program can increase the number of company's loyal customers by as much as 80 percent.

B. About 20 percent of any given company's most profitable customers are likely to be its competitors' most profitable customers as well.

C. It is unreasonable to expect more than 20 percent of customers to be 100 percent loyal to any particular brand of the product.

D. Even "loyal" customers cannot reasonably be expected to stick to one particular brand of product more than 80% of the time.

E. A relatively small number of loyal customers is responsible for about 80% of the company's profits.

In support of loyalty programs, companies often invoke the “80/20” principle, which states that about 80 percent of revenue typically comes from only about 20 percent of customers.

What is the 80/20 principle? That 80% revenue comes from 20% of customers i.e. most revenue comes from a small fraction of the customers. So the companies that invoke this principle believe that a small fraction of customers bring in most of the revenue. So they take measures to ensure that they stay loyal and give them incentives to keep coming back.

A. A well designed customer loyalty program can increase the number of company's loyal customers by as much as 80 percent.

No. They believe that 20% are loyal and they bring most business. So they try to ensure that these 20% are incentivised to keep coming back.

B. About 20 percent of any given company's most profitable customers are likely to be its competitors' most profitable customers as well.

Note that the passage does mention "Such multi-brand loyalty means that one company’s most profitable customers will probably be its competitors’ most profitable customers as well." but that is the author's view, not the belief of the company. We don't know what the company thinks about this.

C. It is unreasonable to expect more than 20 percent of customers to be 100 percent loyal to any particular brand of the product.

We are not given that the company thinks it is unreasonable to expect more than 20% customers to be 100% loyal. They try to establish loyalty as much as they can using their incentive programs.

D. Even "loyal" customers cannot reasonably be expected to stick to one particular brand of product more than 80% of the time.

We are given that loyal customers also usually have divided loyalty, but this is given as the opinion of the author, not of the company. Hence irrelevant.

E. A relatively small number of loyal customers is responsible for about 80% of the company's profits.

Correct. This is what they mean by 80/20 principle and this is what they believe when they invoke it.

Answer (E)

agrasan · Answer

Hi experts  KarishmaB   GMATNinja   DmitryFarber   GMATNinjaTwo   sayantanc2k

4. The passage suggests that companies that invoke the "80/20" principle in customer loyalty programs believe which of the following?

(C) It is unreasonable to expect more than 20 percent of customers to be 100 percent loyal to any particular brand of the product.

In question-4, I am still unclear with option C. 
I referred to the following lines in the passage to infer C and my reasoning is that we are given that  ~10% of buyers are 100% loyal to a particular brand , thus, C looks good as ~10% is definitely not more than 20%.

"However, this profitable 20 percent are not necessarily loyal buyers, especially in the sense of exclusive loyalty. Studies have demonstrated that only about 10 percent of buyers for many types of frequently purchased consumer goods are 100 percent loyal to a particular brand over a one-year period."

Please let me know where exactly I am going wrong.

DmitryFarberMPrep · Answer

We can certainly demonstrate that fewer than 20% of customers are completely loyal, but that's not what the question is asking. It's asking what the companies that invoke this principle  believe.  The part about limited loyalty comes from the author, and it's not clear to what extent companies know about this. Also, even if customers aren't loyal, that doesn't mean it's necessarily "unreasonable to expect" them to be so. Imagine that someone was cheating on their spouse, and we told the spouse "it's unreasonable to expect loyalty from this person."

Answer choice E gets directly at what the 80/20 principle is about, in the eyes of the businesses that cite it: 20% of customers provide 80% of revenue.

guddo · Answer

1. The primary purpose of the passage is to

The passage discusses loyalty programs, but its main focus is the idea of customer loyalty itself. Companies use the 80/20 principle to justify loyalty programs, but the passage argues that profitable customers are not necessarily fully loyal. Instead, many customers show divided or multi-brand loyalty.  So the passage mainly shows that complete brand loyalty is uncommon .

A. question the notion that customer loyalty programs are beneficial

This is too strong. The passage challenges an assumption behind loyalty programs, but it does not directly prove that loyalty programs are not beneficial.

B. examine the reasons why many customers buy multiple brands of products

This is too narrow. The passage does give reasons for multi-brand buying, but only as support for the broader point about customer loyalty.

C. propose some possible alternatives to customer loyalty programs

This is incorrect. The passage does not propose alternatives.

D. demonstrate that most customers are not completely loyal to any one brand of product or service

This is correct. The passage says only about 10 percent of buyers are 100 percent loyal, and that divided loyalty better describes actual consumer behavior. That is the central point of the passage.

E. compare the benefits of customer loyalty programs with those of other types of purchase incentive programs

This is unsupported. The passage does not compare loyalty programs with other incentive programs.

Answer: (D)

Brovlyn · Answer

I have a question about Question 4. The explanation says that choice E is correct because companies believe that a relatively small number of loyal customers generate about 80% of the company's revenue or profits. However, I'm not convinced by this reasoning. The passage only states that 20 percent of customers account for about 80 percent of revenue. Doesn't "20 percent" simply describe a proportion rather than "a relatively small number"? For example, 20% of a very large customer base could still be millions of customers, which would not necessarily be considered a small number. Isn't the explanation making an unsupported assumption by equating "20 percent" with "a relatively small number"? Thank you so much!

guddo · Answer

I’d say the phrase “relatively small number” means small relative to the whole customer base, not small in absolute terms. So even if 20% equals millions of customers, it is still a relatively small portion compared with the full 100% of customers. The 80/20 principle itself contrasts a smaller group of customers with the much larger remaining group. So (E) is not making an extra assumption. It is just restating “20 percent of customers” as a relatively small share of customers. More on question 4 is the posts below: https://gmatclub.com/forum/customer-loy ... l#p2026834 https://gmatclub.com/forum/customer-loy ... l#p2974690 https://gmatclub.com/forum/customer-loy ... l#p3574646

egmat · Answer

Hi Brovlyn,

Good, careful reading. You're right that "20 percent" is a proportion, not a headcount. The key is the word  "relatively"  in choice E, and what it's measured against.

Look at the exact wording of the principle in the passage:

"about 80 percent of revenue typically comes from only about 20 percent of customers."

Notice the word  "only."  The whole point of the  80/20  principle is a mismatch: a  large  share of revenue ( 80% ) traced to a  small  share of the customer base ( 20% ). "Small" here isn't an absolute count - it's small  relative to the total number of customers . And that's precisely what choice E says: "a  relatively  small number of loyal customers." The word "relatively" tells you to compare against the whole base, not against some fixed threshold like "a million."

So your objection - that  20%  of a huge base could be millions of people - is true, but it doesn't break E. Even if those loyal customers number in the millions, they are still a small  fraction  (one-fifth) of everyone. "Relatively small" and " 20 percent  of the base" are describing the same idea from two directions.

Here's a simple stand-in to feel it:

"A relatively small number of players scored most of the team's points."

If a  50 -player squad has  10  players scoring  90%  of the points, those  10  are a  relatively  small number - even though  10  people isn't tiny in the abstract. It's small  compared to the 50 . Read E the same way, and it maps cleanly onto the  80/20  statement.

That's why E is safe and the others aren't: E just restates the principle, while B, C, and D pull in the author's later points, not the belief of the companies invoking  80/20 .

Answer: E

Customer loyalty programs are attempts to bond customers to a company

Prep Toolkit

Top 5 GMAT Debrief Videos

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards

GMAT Reading Comprehension (RC) Questions

Customer loyalty programs are attempts to bond customers to a company

Prep Toolkit

615 to 715 in 15 Days (Ria's Strategies)

More than Quant/Verbal Abilities: Speed vs. Accuracy

745 with Only Self-Prep and GMAT Club

From 555 to 765: 210-point Improvement

Perfect 805 Score Debrief by Julia

My Rewards