Customer Loyalty

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Description of Customer Loyalty. Explanation.

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Definition Customer Loyalty. Description.

Customer Loyalty in general is the behavior which clients exhibit when they make frequent repeat purchases of a brand.

In strategic marketing, customer loyalty is a business model in which company resources are employed so as to increase the loyalty of customers and other stakeholders in the expectation that corporate objectives will be met or surpassed. A typical example of this type of model is: quality of product or service leads to customer satisfaction, which leads to customer loyalty, which leads to profitability.

A fundamental assumption of loyalty models is that keeping existing customers is less expensive than acquiring new ones. According to Buchanan and Gilles (1990), the increased profitability associated with customer retention efforts occurs because:

The cost of acquisition occurs only at the beginning of a relationship: the longer the relationship, the lower the amortized cost.
Account maintenance costs decline as a percentage of total costs (or as a percentage of revenue).
Long term customers tend to be less inclined to switch and also tend to be less price sensitive. This can result in stable unit sales volume and increases in dollar-sales volume.
Long term customers may initiate free word of mouth promotions and referrals.
Long term customers are more likely to purchase ancillary products and high-margin supplemental products.
Long term customers tend to be satisfied with their relationship with the company and are less likely to switch to competitors, making market entry or competitors' market share gains difficult.
Regular customers tend to be less expensive to service because they are familiar with the processes involved, require less "education," and are consistent in their order placement.
Increased customer retention and loyalty makes the employees' jobs easier and more satisfying. In turn, happy employees feed back into higher customer satisfaction in a virtuous circle.

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Recent User Comments

    			 
             John Nobel - Australia
  	       
  		     Customer Loyalty is Hard to Earn
  	  		 "I reckon the best thing you can hope for is a regular refresh of your product/ services, and repeat purchase because of good customer satisfaction... Loyalty must be earned."
  			   
    	  		 0

    			 
             Bernadette - Kenya
  	       
  		     Don't Assume your Customers are Loyal
  	  		 "For customer loyalty to be successful, there is need for marketing/customer oriented executives who knows what customer retention is all about. From my current study, very few research papers have been done on customer retention and most business tend to ignore it while they assume that their customers will automatically be loyal. Not in the competitive world we leave in."
  			   
    	  		 -1

    			 
             Uwa. Omoregha - Nigeria
  	       
  		     What is Customer Loyalty?
  	  		 "Customer loyalty is when a customer can ignore competition because of his trust and belief in your products/services."
  			   
    	  		 0

    			 
             Bernadette - Kenya
  	       
  		     Customer Loyalty = Customer Retention
  	  		 "Most firms believe that customer satisfaction is customer loyalty. Customer loyalty helps a firm to retain its customers. The cost of a retained customer is less than the cost of attracting a new one. I believe that any firm should have more retained customers than new customers to be profitable. This is so because the cost of gaining new ones is normally higher than the profits of the retained customers."
  			   
    	  		 0

    			 
             Massimo Annaratone - Italy
  	       
  		     Loyalty Situation May Change Quickly!
  	  		 "Sometimes a change of purchasing manager can change the scenario drastically, so the seller should keep transversal contact in the company to always keep a feeling of the situation."
  			   
    	  		 3

Best User Comments

    			   
                 Heins - Netherlands
  	         
  				   Calculating the Benefits of Keeping Customers
  				   "Hello all, I have a question which repeatedly pops up: where to invest your money: keeping customers or buying customers.

Measuring buying customer is easy. But how do we measure the benefit of customer retention (not just the save desk)? How to measure the lesser churn because of an activity on (part of) the customer base?

My feeling is that because keeping is difficult to measure (how can you proof that x customers stayed with your company rather than leaving as a result of your action) that most of funds typically, depending on markets, is spend on new sales.

Any help please?"
    			   
        	  		 9

    			   
                 Pankaj Patel - India
  	         
  				   Customer Loyalty by Providing a Complete Integrated Solution
  				   "I work in a support organization of a well-known IT company. We believe customer loyalty is created by providing what the customer needs and that also should be a complete package. Customers will stick with a company which provides a complete integrated solution for any business need they want to resolve. One big challenge for the company is to be number 1 in relevant field to get enough customer confidence to justify buying the total solution from a single vendor. If your customer doesn't have this confidence in you, this method might not work."
    			   
        	  		 3

    			   
                 Alpin McGregor - UK
  	         
  				   No Idea What is Meant by Customer Loyalty
  				   "In recent months I have had several experiences when dealing with businesses, in particular financial institutions, where I am beginning to question whether senior management has any idea what is meant by customer loyalty and how it is fostered by those at the bottom of the organisation. If senior managers cannot communicate properly about how customers are to be dealt with then they should not be surprised if the organisation loses customers. It doesn't help to get rid of the individual on the switchboard of telesales as the root problem with upper management is still in place."
    			   
        	  		 2

    			   
                 Bulisa Nazo - South Africa
  	         
  				   Customer Retention Profile and Skill Set
  				   "Do you have any ideas on recruitment and selection of the correct profile for retention in a Call Centre? What set of skills or training programs should one be looking at?
Do you have a set of KPIs to measure the individual Call Centre Retentions Team members? Thank you.."
    			   
        	  		 0

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Compare with: Customer Loyalty Program | Customer Relationship Management | Customer Satisfaction Model | SERVQUAL | Relationship Marketing | Relational Capital | Analytical CRM | Permission Marketing

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End of description Customer Loyalty. An explanation.

Copyright 2010 12manage - The Executive Fast Track. V10.4 - Last updated: 11-3-2010. All names tm by their owners.

	└► Ahmed N. Qeshta (Palestine)	Customers Keeping or Buying	"I invest my money in keeping my customers because the cost of buying customer are 25 times higher than keeping a customer."
	└► Larry S King (USA)	My Customers Do Not Need Me	"It has been my experience that companies and/or company executives oft times forget who made them successful in their respective businesses. Customer loyalty goes hand in hand with customer service. Sad to say this important aspect of business is rapidly disappearing in the US, not just in large companies but also in the mom and pop businesses as well. I learned a long, long time ago that my customers do not need me exactly... I need them and I go out of my way to treat customers with the respect and care that they deserve."
	└► Ethan Durda (USA)	Not All Customers are Worth Keeping	"In general keeping customers (and happy ones at that) should be a primary focus of any organization, but that is not an absolute. In my consulting I have more than once suggested that a company drop a customer or two. In one case it was their biggest customer by sales. While this particular customer was a huge buyer of product, the company was actually losing money on them with every shipment and had been for years as they had so many "sweeteners" in their deals. New customers were the only profitable ones and were keeping the business afloat. This was a manufacturing industry, but it can be seen in other verticals as well with the possible exception of retail. The reality is that current customers should not be seen as a sacred cow that should be catered to even to the detriment of the company. Tough accounting and soul searching is important for both new and old customers. Putting yourself out of business to make a friend isn’t good business."
	└► Andy Mellor (United Kingdoom)	Measuring the Benefit of Customer Retention	"I work in a small co. Providing technical industrial services. We take the retention of term contracts very seriously. Calculating the value of retention is easy knowing the amount of new business generated per unit cost of sales and marketing. Volumes with customers tend to grow over the years through sales of additional services to existing satisfied customers, because a customer satisfied with one service already trusts our delivery capability and experience. Our field engineers are therefore our best sales force. When a customer leaves us, the question does arise as to whether this is through dissatisfaction or through cost. This is usually obvious, but we do have several customers who have come back to us after a year or two with the competition. This again is usually an easier sell than to a completely new customer."
	└► Prashant Choudhari (UAE)	Calculating the Benefits: Lifetime Value	"It's been proven across industries that acquiring new customers takes as much as 5-7 times more efforts and cost than retaining existing one. There are enough case studies available on this. Regarding calculating the benefit: the simple method is to look at Lifetime Value (LTV) of existing if retained vis-a-vis new customer and the average ticket/purchase size of your existing customer. However remember: you need to retain a new customer at some time in the future too. But a bucket can not be filled if the leakage at bottom is as wide as the opening at the top."
	└► Niraj Kumbhat (India)	Difficult to Measure the Benefits of Loyalty	"Customers are having many options available nowadays. The days of monopoly have gone. Particularly in India, customers are price sensitive and are looking for cut-throat prices. But yes, if the delivery is good and a relationship is maintained with the customer then one is going to get some privelege over others."
	└► Editor (Netherlands)	Customer Lifetime Value / Lifetime Value	"I think Prashant is pointing in a valuable direction. In the Customer Lifetime Value (CLV) concept, if a new (type of) customer costs €500 to acquire, and the CLV is €600, then the new (type of) customer is judged to be profitable, and acquisition of more similar customers is acceptable. Similarly it appears to be possible to compare the costs of losing an existing customer with the CLV for this type of customers. Who can explain in more detail how CLV is calculated?"
	└► Mrinal Ghosh (1)	Calculating Loyalty	"Loyalty can be calculated based on 3 metrics: - Intention to continue - Recommend the brand - Continue using the brand. The intersection of these will give you the % loyal to the brand. Although people might argue that recommendation or continue to use basically come from satisfaction with the product. But recommendation and intention to continue cannot alone give you % of loyal customers. Say for example in a monopolistic or oligopolistic market, you wont be able to determine loyalty with these two metrics. You need to check the overall satisfaction with the brand."
	└► Marcel Wiedenbrugge (NL)	Calculating CLV: Recommended Reading	"To Heins: finding a right balance is always the trick. As a company you need to focus on both keeping your (profitable) customers, growing & keeping smaller - but potentially big - customers and - unavoidably - getting new customer (preferably the right ones). About cost and revenues and profitability. If you work with ABC, then your finance department can easily tell you things like acquisition cost, revenues and profits. About CLV: one great read on the topic of customer loyality and profitability is The Loyalty Effect of Frederick Reichheld. I dearly recommend it."
	└► Joseph (Malta)	Loyalty Cards May Help	"Such measurements are never easy because they are never on a ceteris paribus basis since, inter alia, they deal with changing moods and competitor strategies to redirect loyalties. One method to facilitate tangible calculations would be the issue of unique numbered loyalty cards for each customer renewable annually (with possible benefits for the customer). These could then be encouraged to propose the brand to new potential customers who will, in turn be provided with new unique loyalty cards. In my opinion, the best (and less costly) advertising comes through word of mouth between loyal and potential customers."
	└► Magesh Kumar (India)	Losing an Customer is Losing Double	"To editor, I don't exactly know how to calculate CLV in absolute terms, but just want to share with you a thought that struck me with respect to the cost of losing an existing customer. I feel it involves economic costs too (over and above the accounting cost that can be calculated). Losing an existing customer is like giving him/her to your competitor, which means you lose out double in the race for market cap. Vis-a-vis your competitor."
	└► S Guin (India)	Calculating Customer Loyalty	"I completely agree with mr. Ghosh on this, assuming I am looking at service-industry, considering the fact that it is more or less oligopolistic with some exceptions (like, the hotel industry in Hawaii). However in the product-merchandizing most of the markets have reached saturation in terms of product-protoypes and manufactureres/retailers. Thus brand-satisfaction, customer retention success-rate through loyalty and referral benefits, etc. come into play. In simple terms, calculating customer loyalty can be a fn of the %age of customers having repeated interaction with us. The calculations can start from the very first interaction of the customer with us."
	└► Sindiso Coleman Dumulomo Tshuma (Zimbabwe)	Customer Loyalty helps to Survive Hars Times	"Customer loyalty is very important to the well being and livelihood of the company. This is particularly true especially in the service industry such as hotels or consultancy business where repeat business keeps you afloat as happened in Zimbabwe in the past 9 years where companies which where able to give good service to customers were able to survive the storm of bad country publicity internationally and still keep operating in the most unfavorable, unprecedented economic situation of all times. Those that did not bother with looking after the customers closed shop. However with improved economic climate those that remained opened will be miles ahead of their competitors."
	└► Joseph (Malta)	Customer Loyalty	"One must not forget to mention the importance of interpersonal relationship; if there isn't one it must be created. Once created it must be nurtured continuously. This might sound a bit philosophical, but isn't it the basis of every type of relationship? It doesn't mean that there won't be disgruntled customers (variety is the spice of life). That some customers are difficult is a reality, but that falls within the 10% where you can't do anything about it, the other 90% is within one's hands to optimize customer satisfaction - even with the difficult ones."
	└► Nagaraj. B. R (India)	Customer Value or Loyalty	"The contents are good and very responsive. But there is no specific method to measure customer loyalty or value."
	└► Marcel Wiedenbrugge (Netherlands)	Customer Loyalty Measurement	"To Nagaraj: I think that the answer to this question is too complicated to answer in just a few lines. About calculating CLV: 1) We need to define the lifecycle of a customer in terms of: - How many years can a customer use the products / services and from what age - How do customers needs and wants develop /change over time and how can the company anticipate on that - You must measure those changes frequently (in terms of customer satisfaction) - What will be the impact of competition over time 2) Then we have to relate that to sales and profitability 3) You have to measure, monitor and analyse migrations (up-, cross-selling, regular -> satisfied -> loyal, defections) over time. So the best we can do is to analyze past behaviour in terms of sales / profitability / satisfaction / retention / defection and relate that to future perspectives for both our customer as our organization (= the ability to keep the value balance stable)."
	└► Md Hafeez Ahmed (India)	Customer Retention is Most Important to Make New Customer	"I am working on a special project of customer retention where I found keeping customer is very important. If a client switches to competive products, this doesn't mean he is not a loyal customer, the difference is you should not give the chance to the customer to switch to other services. There is a simple strategy we initiated to the existing customers of promoting the new options and benefits in which the expenditures for the company are less and more worthwhile for the customer. The main objective is the way of approach which matters a lot to retain customers for a longer duration. This policy would automatically bring customer loyalty, and the investment part for the new customer will be less because the existing customer will have a good experience.."
	└► Tleli Makhetha (South Africa)	Definition of Customer Loyalty	"Marcel is correct, the answer is a little more involved. 1. A business has to first understand the critical success factors relevant to profitability and growth. 2. The next step is to calculate comparative numbers based on existing and retained customers. For example: the net margin per unit sale to an existing customer as against a new customer. Another one is what is the cost of getting a new customer to buy your new product as opposed to an existing customer. The interesting thing though is that once you start tracking these numbers you will likely alter your strategy to either leverage on the lower cost of selling to existing customers or find ways of lowering the costs of selling to new customers. This makes it impossible to have an absolute answer but it provides you with information to keeps your strategy dynamic."
	└► Rajesh Sharma (Nepal)	Customer is Always Loyal	"It like believing the enemy. I.e. the customer will always be loyal towards us. To keep the loyalty, companies must regularly survey the customer needs and act on that."

                       
                        └► John Troughton (Australia)
                        
                      Providing What the Customer Needs
                      "In the old days, providing what the customer needs was enough (that includes the complete package). In 2010, the company has to ensure the wellbeing of the customer; that the product or service satisfies the health, knowledge, relationship, material and financial requirements."

	└► Balachandran Nair (India)	Senior Managers and Customer Loyalty	"When senior management or the CEO of a company is provoked into addressing customer complaints directly, it's time to call it a day. Customer dissatisfaction can increase when dedicated and assertive employees of the organisation are moved out at the behest of frivolous complainants."
	└► Ann Maree Sathasivam (Australia)	Customer Loyalty	"How does the "appropriate" way of dealing with customers translated by executives to those working on the front line. People in high place who choose not to communicate their expectations and organizational standards are in fact delivering appalling customer service to their internal customers ie their staff. If you and others take your business elsewhere and they don't recognize the signals then they will not receive the fat bonuses they are used to. The message will eventually sink in that loyal customers are worth the effort because they are what keep us all in a job!"
	└► Laurie Vogt (South Africa)	Middle Layer of Management Removed	"The drive for profits has resulted in the removal of the middle layer of management in most companies. It looks great on the operating statements, but... Unfortunately, because senior management don't take the time to understand what their managers do and are mainly interested in the bottom-line, they have removed the management level that oversees, coaches and mentors lower level staff. With that critical experience removed, it is no wonder that customers service is questioned. If you service your customers properly, and treat them as valuable stakeholders, they will remain with you and contribute handsomely to your business."
	└► Bala Subramanian (UK)	Understanding of Customer Loyalty	"I fully agree with Alpin McGregor. In his comment senior management is not having any idea of what customer loyalty means and increase the customer resentment rather than loyalty. The phrase that is used more and more is "they are bad" yet choice is limited. I call this a “de-link“ between an organisation and its customers. This happens as an organisation grows in size. I am sure all of us can relate this most larger corporations we deal with on a day to day basis."