2003 Q4 Why Loyal Customers Are More Profitable
Have you ever wondered what the value of a customer is to your organization? Many companies tend to spend more time and money trying to gain new customers than retaining existing customers. It’s been reported through several studies that the average company in the U.S. spends six times more money on efforts to attract new customers than it does on efforts designed to nurture and keep its existing customers.
Why are loyal customers more profitable than new customers? The following chart, adapted from The Loyalty Effect, illustrates a number of factors that contribute to a company’s profitability as a result of maintaining a loyal customer base.
These factors include:
Acquisition costs:
Gaining a new customer typically requires some marketing expenses such as advertising, sales commissions, sales force overhead, etc.Base profit:
Base profit is the difference between selling price and cost. This assumes each customer is profitable which is not always true.Revenue growth:
With most companies customer spending tends to increase over time as customers become more familiar with the company and its product and service offerings.Cost savings:
The longer you have a customer the more efficient you become in servicing them.Referrals:
Long term customers tend to recommend your business to others because of their satisfaction with your company.Price Premium:
In most industries, old customers tend to pay effectively higher prices than new ones who may receive trial discounts, introductory offers, etc.
Adapted from The Loyalty Effect