Are Loyal Customers Profitable?
By David Dorf on May 20, 2009
Are your loyal customers your best customers? Successful retailers want profitable customers, regardless of their loyalty. The consumer that's always in your store but only buys the loss-leaders is not profitable. Nor is the shopper that habitually returns items that can no longer be sold at full price. So if we think about shoppers in terms of profitability, they fall into the following categories:
1. Buys high margin items frequently
2. Buys high margin items occasionally
3. Buys low margin items frequently
4. Casual shopper
5. Bargain shopper
Loyalty programs often focus on making shoppers toward the low end move up the chain. This is done by influencing their behavior to "shift" to higher margin products/services and "lift" the the number of products/services purchased. By offering rewards for increased frequency, recentcy, basket size, etc. shoppers are incented in ways that make them more profitable. Of course the cost of those rewards needs to be factored into the equation as well.
Buy those aren't the only types of shoppers. There are unprofitable shoppers as well:
6. Not a shopper
7. Problem shopper
Those that don't shop your store don't cost you anything, but they have profit potential. Much marketing money is spent to entice those shoppers, often at an overall loss. Shoppers that only buy products below cost, or return products too often may actually be cutting into profits. When these shoppers become loyal, it exacerbates the problem.
The authors of the forthcoming book Why Loyalty Matters state the following in their article When Customer Loyalty Is a Bad Thing:
The fly in the ointment is that typically only 20% of a firm's customers are actually profitable. And many — often most — of a company's profitable customers are not loyal.
Whether you believe that statement or not, its clear that retailers should focus on shifting and lifting their customers up the chain, and worry more about profitability than loyalty.