customer loyalty - definition

Customer loyalty is determined by three factors: relationship strength, perceived alternatives and critical episodes.

Major factors that negatively affect customer loyalty:

• the customer moves out of the service area
• the customer no longer has a need for the products or service
• more suitable alternative providers become available
• poor handling of a critical episode

Engendering and enhancing customer loyalty is a core objective of loyalty marketing – a strategy employed by businesses in order to increase the loyalty of customers and other stakeholders in the drive to meet and exceed commercial objectives.

The fundamental assumption in loyalty marketing is that keeping existing customers is considerably less expensive than acquiring new ones. Reichheld and Sasser claimed that only a 5% improvement in customer retention can lead to an increase in profitability between 25% and 85%, depending upon industry sector. Therefore increased ‘customer loyalty’ has a direct relationship with increased profitability.

The increased profitability associated with customer loyalty occurs because:

• acquisition costs only occur at the beginning of a relationship, so the longer the relationship, the lower the amortised 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
• long-term customers may introduce new customers via word of mouth
• long-term customers are more likely to purchase add-ons
• satisfaction breeds habit, meaning that long-term customers are less likely to switch to competitors, making it less likely for competitors to enter the market or gain market share
• long-term customers are less expensive to service because they are familiar with the process and require less active familiarisation
• loyal customers are more consistent in their buying behaviour
• high levels of repeat customers makes employees jobs easier, which feeds back into improved customer service

It is also important that marketing departments assess as best they can the profitability of each customer or business segment, whether in a business-to-consumer (B2C) or business-to-business (B2B) context. Not all customers are profitable and striving to maintain the loyalty of unprofitable customers or partners is not always commercially viable. Analysing customers’ relationship costs with revenue can demonstrate this and it is best business practice to terminate those relationships, which are found not to be profitable.

To find out more about customer loyalty and how ICLP can help your business, please visit ICLP-the global loyalty marketing agency.