I wanted to share this document written by Michael Smith of The Ohio State University’s Fisher College of Business. Smith is the Director of Corporate Partnerships, and is a Senior Lecturer in Marketing and Logistics. I welcome you to read this article and take a look into the details of loyal customers.
Loyal Customers Are Always Best, Right?
Or, as Lee Corso might say, “Not so fast my friend”
By: Michael Smith of The Ohio State University
Countless research, articles, books and presentations have preached the value of customer loyalty and quantified it in terms such as “9 times more profitable” than new business, etc. Marketing and Sales plans around the world are founded on this “truth.”
But, is this something you should accept merely at face value and invest, plan and act accordingly?
There is no question that customer loyalty can be a good thing. If you can indeed retain a customer with very low selling expenses that is obviously preferred to investing huge sums for capturing a new customer. But, too many businesses have taken this to an illogical extreme and built the entire business around this accepted truth.
However, this is something that you should examine carefully before being “all in.”
First, systems that worship the current customer can often build in processes that all but make it impossible for the sales force to win new customers. Current customers have the priority on technical support, inside sales, problem resolution, design changes, etc. There are limited resources for each and if they are always provided on a priority basis to current customers, new customer acquisition suffers.
Second, current customers know you as well as you know them. They have learned which of your products and services provide them with the best value proposition, which are not always the most profitable for you. They learn to do more with less, that is, your lower cost and lower margin products. Also, they learn how to exploit all of the services mentioned above that don’t show up in your gross margin line. Finally, they demand substantial discounts because “I am a long term and high volume customer, and I demand the best pricing you can give anyone.”
Third, loyal customers can be taken for granted by your organization, making them soft and unobservant, until it is too late. It is just difficult to stay focused on a customer that you have held for a long time, who does not make much noise, etc. It is much like staring at the ocean waiting for something, anything, to be different. It never changes, that is, until the customer ultimately decides they are being taken for granted and wants to see greener pastures.
Finally, customers turn over, even for nothing that you did wrong. Sometimes they just want to make a change, shake things up, etc.
So, while customer loyalty can be a very good thing, be careful it does not become the only thing in your customer planning. You must try to retain the ones you should retain (not all of your current customers should be retained) but just as certainly, plan and resource for replenishment.