Profitable Versus the Loyal

Profitable Versus the Loyal

Without question, loyalty is important. All companies want loyal customer hang on for years, devote a larger share of their wallet to the company, and recommend the company to their friends. Customer loyalty helps drive profits. But not all loyal customers are profitable. Some customer is loyal because the company offers particular deals; the company may not be earning much profit from that customer.

The researchers done by Werner Reinartz and V. Kumar, found that much of what we accept to be true about customer loyalty is bunk.

In fact, after studying 16,000 individual and corporate customers over a four-year period for four different companies, they report in the Harvard Business Review that the relationship between loyalty and profitability is only weak to moderate. They also found that three main claims made in favor of customer loyalty programs are flawed:

1. It costs less to serve loyal customers.

In fact, for the four companies they analyzed, long-standing customers were not cheaper to manage than short-term customers. The only strong correlation between customer longevity and costs they found -- in a high tech corporate service provider -- suggested that loyal and presumably experienced customers were actually more expensive to serve. Long-standing customers in business-to-business industries know their value to the company and exploit it to get premium service or price discounts.

2. Loyal customers pay higher prices for the same bundle of goods.

In fact, the research found this is wrong. The evidence from their surveys indicated that long-term customers paid lower prices than newer customers. There prices were between 5% and 7% lower depending on the product. They found no evidence that loyal customers paid higher prices in the consumer business. A loyal customer is actually more price sensitive than the occasional customer. The researchers also suggest that loyal customers may strongly resent companies...