As we find ourselves firmly in the biggest shopping season of the year, holiday specials and deals have been floating across my screen from various retailers to which I subscribe. “20% discount for new customers only!” and “$10 off your first purchase of $25+ with us!” are common slogans that I see hitting my inbox. From the standpoint of business growth, these are incredible incentives to get me to purchase from someone I’ve never purchased from before – especially now that holiday sales have begun.
However, these strategies often get me to hit “unsubscribe” faster than televisions sell out on Black Friday. Why? Because I’m usually subscribing to companies I’ve ordered from in the past in the interest of receiving company news and exclusive discounts. Peddling to someone that isn’t me shows that you don’t care enough to segment your customers from your non-customers. Either that, or you’re not interested in your customers once they become actual customers. For my personal loyalty, I start to question how valuable I really am to the company.
The trade-off between customer retention and customer growth is something we see at the LRC frequently, both personally and professionally. For instance, cable companies are notorious for focusing on attracting new customers through low introductory pricing. When customers sign up, they are typically forced into multi-year agreements, which makes it nearly impossible to overcome the switching costs of breaking the agreement once the rates increase after the introductory rate expires. It works for these companies and keeps a lot of people with them, albeit unhappily.
On the other hand, one of the most “buzzed about” topics in marketing is loyalty rewards programs. Almost everywhere I go, there is a free app or a card that I can get that will accrue points as I spend more with the company. One of my favorites is the Kroger grocery chain. They have a “best customer” coupon program that offers me great coupons tailored to the things I have purchased in previous shopping trips. They also offer everyone a digital coupon every week for a free item. On top of this, I also take advantage of their fuel rewards program – for every dollar that I spend with them, I earn a point toward money off of gas. Certain purchases, like gift cards or shopping on specific days, help me to earn more. Just one of these incentives would be a great deal, but combined, it shows that they really care about their Loyal customers and nurture these relationships.
At the LRC, one of our basic principles is that if you are looking to grow your business, look to your current customer base first. Understanding and catering to your Loyal customers benefits you in (at least) three different ways:
1. Increased share of spend. In our experience, Loyal customers make up approximately 30% of the customer base of a healthy organization. While share of spend can vary greatly, we like to see around 60-70% of Loyal customers giving their share to the organization to which they are loyal. As you can imagine, companies don’t always capitalize on these potential profits they could be getting.
2. More time and resources spent on your “best fit” customers. In these new customer sales strategies, are you really targeting a customer that is right for your company or are you selling to anyone willing to buy your product? We often find that companies are losing money by trying to retain and grow customer accounts that fall into the Vulnerable category. These customers demand more than the business model is designed to give, leading the whole company to suffer. Maybe not at first, as the influx of new customers brings with it new money. However, over time, these customers cost in terms of resources and time spent focusing on retention. These Vulnerable customers are also more likely to give that company they’re Vulnerable to, at most, only around 20-30% of their share of spend.
3. Stable, healthy, predictable profits. Even a small increase in customer loyalty can have profound and lasting effects on profitability. We consistently see that Loyal customers have significantly longer tenures (or significantly longer life cycles). As such, the revenue they produce is stable and predictable. Focusing on the low-hanging fruit to keep the right customers happy is an easy way to ensure long-term financial success.
While growth through newly acquired customers is certainly not a bad thing, giving back to your current customer base has many significant benefits. For instance, I am far more likely to shop at Kroger than any other grocery store because of the many rewards it offers to its customers and I have several reasons to come in, whether it’s to redeem a coupon or get to the next fuel reward level. I feel valued as a customer.
As you develop your holiday strategy for the rest of December and beyond, consider identifying and gifting to your Loyal customer base as well. The return on your investment will be worth it!