Loyal Customers: How Valuable are They?

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Posted by Robin Johnston on Dec 26, 2017 7:00:00 AM
Robin Johnston

Loyal customers, particularly if they're big spenders, add a solid revenue base upon which to grow your business. You can count on their steady business as you seek to build up their numbers. Many businesses understand this and appreciate customer loyalty in terms of revenue generation and business growth. However, you can benefit from loyal customers in other ways that pertain to reducing the cost of running your business. To name a few:

  • 86% of loyal customers are inclined to recommend the brand to others which results in 16% higher average value
  • The cost of acquiring a new customer can be up to 25 times greater than keeping a repeat customer

Let's explore some of the ways loyal customers help drive costs down and increase revenue for your business.

Reduced Inventory

Inventory management is a balancing act between having too little or too much inventory. For both retail and restaurant businesses, insufficient inventory means lost revenue from stockouts that cause unhappy customers to take their business elsewhere. Alternatively, customers may fail to return after waiting for a backorder (retail) or ordering an alternative meal (restaurant).

The cost of excess inventory for retailers includes storage costs and loss of inventory value because of seasonality factors or obsolescence. Inventory can also be damaged, lost or stolen. Excess inventory ties up money that could have been used for business growth. Restaurants face food spoilage or reduced profit when selling excess food inventory as low cost meals.

A crucial element of getting inventory right is accurate demand forecasting. Failing this, many businesses will pad their inventory with safety stock to deal with unexpected demand surges. The greater the demand uncertainty, the larger (and more expensive) the safety stock required. For many markets, demand forecasts for first time purchases have a high degree of associated uncertainty. This fuzziness is caused by many factors including the success or failure of marketing campaigns.

On the other hand, forecasting the demand of loyal customers is relatively straightforward. Customer loyalty means they're repeat buyers, which provides a business with plenty of data on their patterns and habits. Many types of consumable goods require replacement on a regular basis such as batteries or light bulbs. Predicting their demand from repeat buyers involves very little uncertainty.

Other less regularly purchased items require more information and analysis. However, the long purchasing histories of repeat customers provide plenty of data. In addition, loyal customers are less reluctant to volunteer whatever information is asked of them. In any case, accurate demand prediction is highly feasible. This forecast accuracy reduces the need for costly safety stock. This is true for both retail and restaurant businesses.

Reduced Marketing Expenditures

Unlike a prospect with no prior interaction with a business, repeat customers require little inducement to continue their regular patronage of a favorite retail store or restaurant. With loyal customers such as these, the main concern of marketing is increasing their lifetime value. This means reducing their churn rate (percentage that end their patronage per unit of time), and increasing their spending per unit of time. Programs that reward repeat customers for their loyalty make them feel appreciated. This increases their feelings of goodwill toward the business and reduces churn rate. Increasing their spending is often done with upsells or upgraded products (retailers), or more expensive dishes (restaurants).

By contrast, acquiring new customers requires nurturing them as they make their way through the buying cycle. A simplified buying cycle consists of four stages:

  • Awareness of a need
  • Exploring options for this need
  • Narrowing down these options to one solution
  • Buying that solution as a specific product or service
This cycle is often lengthy where each stage requires a different series of marketing messaging and actions. This is a costly marketing process compared to the previously discussed program of increasing the lifetime value of loyal customers.

Of course, for continual growth of a loyal customer base, new customer acquisition is necessary. However, too many businesses are highly biased toward getting new customers while devoting too little of their marketing resources to their loyal customers. By shifting the balance of marketing resources in favor of increasing the lifetime value of loyal customers, big savings are realized with leaner inventories and reduced marketing expenditures while simultaneously increasing revenue generation and business growth.

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