August 1, 2002

How Much is a Loyal Customer Worth?

"A good customer should not change his shop, nor a good shop change its customers." -Chinese Proverb

When I was in the office furniture business, I was always surprised at how important previous customers were to our success. Once we sold somebody home office or business furniture, it was amazing to see how many times they would come back for more. Almost 50% of our total sales of file pedestals, chairs, bookcases, and even complete office systems were to customers who had already purchased from us.

We experienced what most good companies have discovered. Loyal customers represent your business' goodwill and they are intangible assets that add value to your balance sheet. Domino's Pizza chain estimates that a loyal customer is worth about $5000 over the 10-year life of a franchise; the Ford Motor Company has calculated that a loyal customer is worth $142,000 over their lifetime.

Have you calculated how much a repeat customer is worth to your business? If you have, I'm sure you've discovered some breathtaking numbers. What would just a 10% increase in customer loyalty mean to your bottom line? What are you doing to boost customer loyalty?

Once you've proven your company's value to a customer, you'll discover that many of them won't bother to shop around. Very few businesses operate in markets where the lowest price is the only consideration. Usually, by providing quality products with great service, you can ensure customer loyalty. When you consider a recent survey that shows that it costs most businesses about seven times as much to find a new customer as to retain one, it's hard to overstate the importance of customer loyalty.

Most people in business have heard of the 80-20 rule. That is, 20% of your customers provide 80% of your business. But, how easy it is to forget this while we're in hot pursuit of new customers. Too often, business people see themselves as hunters rather than cultivators. Instead of constantly trying to bag new customers, it will likely prove much more fruitful to consider whether there is a new product or service you can sell to your existing loyal customers.

In these tough economic times, loyal customers are a great safety net representing a healthy bank balance to draw upon. As much effort as needed should be invested in understanding your customer's buying cycle. What steps do your customers take prior to and after they actually purchase from you? By breaking this process down, you'll learn how to turn suspects into prospects, prospects into customers, and, eventually, customers into champions who will sell your business to others.

Lastly, I've been reflecting on some wise words that I learned in college when I stayed at a Zen monastery in Kyoto, Japan. At multiple 4:30 a.m. meditation sessions, a monk had us chant, "The less is the more." In that spirit, our newsletter is now going to a biweekly format to ensure that I have enough time to produce a newsletter that is both informative and interesting.

Best wishes,
Patrick Galvin