Customer Loyalty – 5 Surprising Facts About its Importance

Customer loyalty is one of those key indicators of an enterprise’s success that every executive knows has a significant impact on the company’s bottom line.

It seems intuitive: retaining customers provides the opportunity to increase profit—so intuitive that drilling down to grapple with the importance of customer loyalty often is overlooked, and at a cost.

Loyal customers, they don’t just come back, they don’t simply recommend you, they insist that their friends do business with you.

— Chip R. Bell (Source)

Fortunately, Forbes Insights and Sailthru recently published a study, Retentionomics: The Path to Profitable Growth, that shines a spotlight on best practice approaches to attracting and retaining customers in the media and retail sectors.

A Forbes summary of the study noted that the vast majority of companies studied got high marks for understanding valuable acquisition channels, customer lifetime value (CLV) and churn rate.

• Surprisingly, though, researchers discovered that “they may not be able to translate data into business outcomes when it comes to retaining customers and not prioritizing loyalty enough.”

Let’s look more closely at surprising findings related to customer loyalty.

C-suites prioritize acquisition over customer loyalty

• The study revealed that as few as 15 percent of the participating companies tie CLV to revenue and growth.
• More surprisingly, 40 percent say that while their C-suite team understands the value of CLV, “they are not able to tie it directly to revenue and growth.”

Absent the right tools to enable a review of data linking CLV to revenue and growth, it is no wonder that customer loyalty gets grayed out of the picture when it comes to strategic planning.

What does that mean for the enterprise?

Executives are handicapped: their ROI data are incomplete without a deeper understanding of the connection between CLV and revenue and growth.

Budgets drive customer acquisition more than customer loyalty

A consequence of the missing CLV-revenue link is where it falls as a marketing budget priority. The study found that in recent years, “the vast majority of budget increases were on the acquisition side—four out of five companies increased here, whereas only two in five increased loyalty budgets.”

That has been true in the face of the wide disparity in the cost of customer acquisition vs. the cost of customer loyalty.

As noted in Business2Community (B2C), “Researchers estimate that today it costs five times as much to acquire a new customer than it does to retain a current one. That’s significant not only because it demonstrates the importance of customer satisfaction and customer loyalty, but also because it shows us that we may need to reevaluate the way we calculate the value of our customers.”

The Forbes summary describes a key challenge to a pivot to focusing more on customer loyalty: “In addition to barriers that prevent developing repeat customers, companies face barriers to investing more in customer loyalty. The biggest challenge for all companies is an inability to measure the ROI of loyalty tactics (not including technology concerns)—39% cited this.”

The result of a company’s inability to measure the ROI of loyalty is that its budget priorities may not lead to maximized profits.

Clearly, a company’s financial investments are designed to align with its strategic priorities—and companies that underinvest in customer loyalty also are sending a clear message to their workforce that customer acquisition activities take precedence over loyalty.

What will it take to flip priorities?

The assumption appears to be that acquiring more customers impacts revenue and growth more than working to retain current customers.

But is that true? Should that investment, and that message to the workforce, change?

According to the Forbes report summary:

“Although more than half understand the causes and effects of repeat purchase rates (71%) and customers who purchase only once (64%), neither of these figures as prominently as their understanding of acquisition channels. Retailers also seem less likely to truly comprehend what causes their customers to remain loyal. There is clearly room for improvement in increasing understanding of profitable channels and then translating this knowledge into business results for all companies.”

• What if the company invests in the right tools to facilitate data collection on levels of customer loyalty and break those down further into who, what, when, and why segments?
• What if those data revealed that customer loyalty strategies impacted revenue and growth more than customer acquisition? Or that certain strategies improved the company’s ROI over those of customer acquisition and customer loyalty programs more than paid for themselves?

Picture the new scenario: the C-suite would now see data that would encourage the team to flip their customer-related priorities.

Why pivot to a stronger customer loyalty focus

If you are casting for ways to strengthen your company’s future, customer loyalty is a great place to start.

The investment in the right online tools to track and analyze data is like picking the low-hanging fruit for an outsized return. Consider these points:

Budgeting: B2B advises that a stronger emphasis on customer loyalty leads to a deeper understanding of cash flow and a more accurate marketing budget: “The more predictable your revenue streams are, the better. If you know exactly how much money will be flowing through your company this year, next year, and beyond, you’re already off to a good start for budgeting and creating sustainable growth.”

• What is that worth to the C-suite? Typically what is lacking to make that leap are the right tools to generate the predictive data analysis needed to connect customer loyalty tactics to revenue and growth.

ROI: B2B states: “Most B2B firms are now spending a lot of time and effort avoiding “one and done” customers — ensuring that the money they spend to acquire customers today also generates returns for years to come.”

Profit: In a significant research study titled The Economics of E-Loyalty, published in the Harvard Business Review, Bain’s Frederick F. Reichheld and Phil Schefter found that for all customers, “increasing customer loyalty rates by 5% increases profits by 25% to 95%.”

Not only that, but repeat web-based customers “spend more than twice as much in months 24-30 of their relationships than they do in the first six months.”

• Reichfield and Schefter also found that “loyal customers also frequently refer new customers to a supplier, providing another rich source of profits.”

Small Business Trends offers these eye-popping statistics on the benefits of customer loyalty:

• Your probability of selling to an existing customer: 60-70 percent. Your probability of selling to a prospect: 5-20 percent.
• 20 percent of current customers will drive 80 percent of your future profits.
• Current customers account for 65 percent of a company’s business.
• If you boost your customer loyalty by just 10 percent, you boost the value of your enterprise by 30 percent.

How to get there from here

You already know the value of listening to customers. Customer loyalty and listening to your customers can greatly improve your customer referrals. Thus resulting in increased profits.

It turns out that a survey conducted by HundredX demonstrated that the right IT tools can have the same effect on customer loyalty. As CIO Insight reports:

“IT solutions which enhance the ability to listen to customers, findings reveal, are emerging as top tools to boost satisfaction levels among those customers. And these ‘happy folks’ are then much more likely to transform into brand ambassadors for the companies that make an effort to lend them an ear.”

It’s time to give customer loyalty the priority it deserves to keep your competitive edge. Let us know what you think about customer loyalty in the comments section below.

Photos by Iqbal Osman1