If today’s revolutionary business leaders were to outline a declaration of their dictums for business success, would they claim that all customers are created equal? I doubt it. Just like parents, business leaders can’t help but notice that each customer is unique. And although they might not admit it, most business leaders acknowledge that long-term customers are treated differently than new customers. Why? Because long-term customers bring certain unique benefits to any organization.
First, long-term customers represent a stable form of dependable revenue, even if their individual purchases are small. Most companies get two-thirds of their sales from current customers, in fact. For instance, according to A Complaint is a Gift, by Janelle Barlow and Claus Moller, “Domino's Pizza calculates that over just a 10-year period, regular customers are worth about $5,000 [each].”
Still, it can be difficult to see how much base profit long-term customers provide in the long run. To think beyond each individual sale, consider the following formula: Multiply the customer’s average purchase by the number of purchases they make per year, and then multiply for five, ten, or twenty years. For instance, if you run a dry-cleaning business, a customer might only pay $25 per week. However, if we translate that to a yearly expenditure, we see that this customer purchases $1,200 of cleaning per year. In five years, that one customer would bring in $6,000 of business.
And that’s just direct business. If a customer sticks around for years on end, they are almost certainly recommending your business to their friends and families, effectively doing your recruiting work for you. In other words, long-term customers can help lower your marketing and sales budget. Furthermore, those who come to your company on a referral are more likely to be engaged customers. As PeopleMetrics’ 2009 Most Engaged Customers report stated, “Customers who choose to use an organization after receiving a recommendation are more engaged and more forgiving than those that come to you blind.”
But these aren’t the only reasons why long-term customers are more profitable than new customers. As Fred Reichheld shows in his landmark book, The Loyalty Effect, long-term customers also require lower operating costs, as they understand how your system works. As Richheld writes, “In financial planning, for instance, planners log about five times as many hours on a first-year client as they do on a repeat customer.” New customers require more handholding from your staff, as they don’t yet know how your business works.
Finally, considering the considerable costs involved with attracting new customers, maintaining happy long-term customers is one of the most effective methods for increasing profits. As Reichhelds points out in an author interview, “A five percentage point increase in customer retention in a typical company will increase profits by more than 25%, and growth by more than 100%!”
Customer Engagement Management (CEM) is proven method for researching, tracking, and improving customer retention. CEM focuses on customers’ emotional connections to brands, and allows managers to respond in real-time to customer queries, suggestions, and complaints. More than just a conglomeration of customer data, CEM provides a system for improving operations in the long-term by improving customer experiences.
Posted on 10-12-2009