How Customer Loyalty Drives Profitability

Peter Roesler, President - Web Marketing Pros

By Peter Roesler

President, Web Marketing Pros

customer-loyaltyOne of the main benefits of social media marketing is that it allows organizations to foster closer relationships with their customers. When an organization uses social media to increase brand awareness and build stronger relationships with their customers, it also helps the organization by building customer loyalty. Customer loyalty is not something to be taken likely. This post will look at some of the research that shows the value of customer loyalty and customer retention. For most companies, improving customer retention by building customer loyalty may be just as important as the getting the initial sale.

Customer loyalty is about more than just keeping clients happy. It’s the key to maximizing profitability. According to data from Forrest Research, it costs five times as much to acquire new customers than it does to keep current ones. So for two companies with the same sales revenue, the company that sells more products to repeat customers will have significantly higher profits. This shows the value of promoting customer loyalty, because gaining new customers at the expense of old ones is a losing proposition in competitive industries.

One reason some business owners don’t see the value in promoting customer loyalty is that they think it’s hard to measure and the effects are small. Both of these assumptions incorrect. The easiest way to measure customer loyalty is to track the number of customers who stop doing business with a company, this is called the “churn rate”. Examining a few statistics related to churn rates shows the effects of customer loyalty are not small at all.

The average company loses 10 percent of its customers every year. If focusing on customer loyalty can lower the churn rate to 5%, the profitability of the organization will increase by 25 percent to 125 percent, depending on the industry. The Gartner Group released a report that said “80 percent of your company’s future revenue will come from just 20 percent of your existing customers.” The global marketing research firm KISSMetrics estimated that the average cost of a lost customer is $243. The value in keeping existing customers satisfied with the product and the brand is impossible to ignore.

Even when beginning new marketing campaigns to increase sales, businesses are three times more likely to sell a product to an existing customer than to a new prospect. According to Marketing Metrics, “The probability of selling to an existing customer is 60 to 70 percent. The probability of selling to a new prospect is 5 to 20 percent.”

Building customer loyalty means having an approach that emphasizes customer satisfaction over short term sales numbers. Even If a company makes record profits by selling a product that causes them to lose customers, the earning potential for the organization in the future is still significantly reduce. The Harvard School of Business has a tool that makes it easier for businesses to see the value in customer loyalty. The Customer Lifetime Value Calculator shows businesses the effect that customer retention has on profits. Customer loyalty increases the profits by encouraging repeat business, reducing the operating costs for a business, establishing a favorable price premium, and by generating referrals.

To be sure, it is important for businesses to find new customers. But the fact remains that a company’s current customers will be the foundation of their future success. This is why social media marketing is important to companies with an eye on the future. Social media allows businesses to talk to their customers and build relationships in ways and speeds that were unthinkable using the technology of the previous generation. Social media channels can be used to improve customer service, public relations, and even customer acquisition, all of which are important to customer loyalty. Fortunately, increasing customer loyalty is a business strategy that benefits an organization now and helps to ensure its survival in the future.


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