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.
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Posted by Greg Robinson at 11:36 AM | Comments (5)
