February 07, 2005
Does Customer Loyalty Matter?
Seems like the answer is an obvious "yes", yet many organizations focus most of their marketing dollars on customer acquisition rather than on keeping the customers they already have. Not to say that customer acquisition isn't important, but the benefits of focusing on building the loyalty of your current customers is pretty compelling. Loyal customers stay with you longer, deepen their relationship with you through buying additional products and services, are less sensitive to price increases, and they recommend your company's products or services to others.
The irony of a customer acquisition strategy is that it is typically a money losing strategy during the first year. This is because the thare are typically extensive sales and marketing costs associated with acquiring the customer and, in some cases, significant incentives (see banks, brokers and telephone companies)to get the customer to switch to your product or service. On average, you retain a customer for two or more years to begin to make money on the relationship.
As customers stay longer they become even more profitable because they cost less to service since you know what they expect and may even setup routine, less expensive service arrangements. They also develop a level of trust with you that leads to a willingness to do more business with you to avoid the hassle of establishing new relationship, reiterating needs to new suppliers, etc.
Because of the switching costs associated with moving their business, loyal customers will often pay a little more for quality they trust. These customers will also refer 4 to 5 customers to you to help you build you business. These referrals cost less to acquire than other new customers because you save on advertising, promotion, marketing and selling expenses.
As you create your marketing budget for 2005, keep in mind that your current customers are typically more valuable than potential customers (a bird in the hand, as it were!). Do you have sufficient funds in your budget for activities geared at keeping current customers? Are you spending money to understand how loyal your current customers are and encouraging them to refer others to you?
Understanding what your current customers value and developing a retention strategy for them is the first step for executing a long-term growth strategy.
Poll Closed
Posted by Greg Robinson at February 7, 2005 11:36 AM
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A lot of what you say makes sense, but mostly for situations like financial services organizations, perhaps pharmacies, and companies that have "clients" as opposed to just customers. Straight retail operations (think: Target or Wal-Mart) may be more complicated. Price may bring them in, but if not located near by, may or may not matter much going forward; and for quality items or specialty items they may seek other stores; and people "shop" more, looking for the right thing. I doubt that loyalty plays much role for the largest percentage of customers. As for retail convenience stores, it's strictly convenience, and brand is likely equally irrelevant.
Posted by: at November 29, 2004 11:57 AM
Our Co. wants a customer for life. Your right, the easiest and most profitable customers to sell are the ones you have sold before. If you don't retain the customers you have you will run out of new ones in a realitivly short period of time. I've seen it happen time and time again over the years. The new business on the block does a great job initially with a "gimmick" or "hook" but soon fails. Success and business are built one customer at a time by exceeding customer expectations and continualy "raising the bar." Your only as good as the customers last expierience with you. A true satisfied customer will act as an advocate for you by referring additional new customers. Yes, you also have to find legitimate ways to attract new customers but the key is maintaining your old ones.{I am in the retail jewelry business} Let me know if I can help you with a special item in the future. Doug
Posted by: at March 10, 2005 03:57 AM
Doug, I couldn't agree with you more. The best and most cost effective way to attract new customer is through referrals from existing customers. Our research has found that word of mouth is 3-4 times more effective than advertising in attracting new customes.
The problem with advertising or the "gimmick" as you put it is that it may stimulate trial but it may be with customers outside of your target segment. The "hook" may get an initial purchase but it may not be with a customer that you want for life. Customers that refer tend to refer people that are like them . . . thus the customers that come to you may be a better long term fit for your business strategy.
Thanks for the post.
Posted by: Greg at March 10, 2005 07:48 PM
Does anyone have any recommendations for referral incentives that have worked and are not discount oriented.
Posted by: at April 2, 2005 04:03 PM
Naomi, it depends on the type of business you are in. Some of the other things customer may value as a reward for providing referrals in addition to money are recognition, being included in select "user" groups that test new product concepts, getting previews of new products before they hit the market, or participating in discussion forums for a select group of important customers. Hope this gives you some ideas to work with.
Posted by: at April 3, 2005 06:31 PM
A lot of what you say makes sense, but mostly for situations like financial services organizations, perhaps pharmacies, and companies that have "clients" as opposed to just customers. Straight retail operations (think: Target or Wal-Mart) may be more complicated. Price may bring them in, but if not located near by, may or may not matter much going forward; and for quality items or specialty items they may seek other stores; and people "shop" more, looking for the right thing. I doubt that loyalty plays much role for the largest percentage of customers. As for retail convenience stores, it's strictly convenience, and brand is likely equally irrelevant.
Our Co. wants a customer for life. Your right, the easiest and most profitable customers to sell are the ones you have sold before. If you don't retain the customers you have you will run out of new ones in a realitivly short period of time. I've seen it happen time and time again over the years. The new business on the block does a great job initially with a "gimmick" or "hook" but soon fails. Success and business are built one customer at a time by exceeding customer expectations and continualy "raising the bar." Your only as good as the customers last expierience with you. A true satisfied customer will act as an advocate for you by referring additional new customers. Yes, you also have to find legitimate ways to attract new customers but the key is maintaining your old ones.{I am in the retail jewelry business} Let me know if I can help you with a special item in the future. Doug
Doug, I couldn't agree with you more. The best and most cost effective way to attract new customer is through referrals from existing customers. Our research has found that word of mouth is 3-4 times more effective than advertising in attracting new customes.
The problem with advertising or the "gimmick" as you put it is that it may stimulate trial but it may be with customers outside of your target segment. The "hook" may get an initial purchase but it may not be with a customer that you want for life. Customers that refer tend to refer people that are like them . . . thus the customers that come to you may be a better long term fit for your business strategy.
Thanks for the post.
Does anyone have any recommendations for referral incentives that have worked and are not discount oriented.
Naomi, it depends on the type of business you are in. Some of the other things customer may value as a reward for providing referrals in addition to money are recognition, being included in select "user" groups that test new product concepts, getting previews of new products before they hit the market, or participating in discussion forums for a select group of important customers. Hope this gives you some ideas to work with.
