Are Loyal Customers Profitable?

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:
shopping4.jpg
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.

Comments:

While David Dorf's blog entry is correct about loyal shoppers not being the most profitable and profitable customers are not loyal, brands/companies are built on sustaining loyal customers and upselling to them when the time is right.

If you buy the argument that profitable customers are not loyal, they will look at your product/service as a commodity and move on to another vendor or service provider at any given time. To make up for that lost revenue, you have to spend more energy, dollars and commit additional resources. It's a no win situation that many companies seem to ignore.

I disagree with David's statement that retailers should worry more about profitability than loyalty. I believe you have to worry about both equally. Without those loyal customers as a base foundation to grow the business, you're stuck with profitable customers and a high attrition....once again, going into the cycle of creating more energy, dollars and resources.

Successful companies (like 3M, BASF, Starbucks, etc.) have succeeded by:
- Sustaining customer loyalty and upselling (case and point, Starbucks customers are hugely loyal coffee drinkers AND Starbucks upsells them with a variety of foods, music, books and coffee accessories)

- Turning highly profitable, but "non-loyal" customers into loyal customers over a period of time.

- Commmunicating your base value proposition to prospects. Once again, the objective is to gain their loyalty and upsell.

Loyalty does count. Think of what you do at the Supermarket and what you buy. First, do you go to the same supermarket week after week? Do you buy the same brands? The answer is (likely) yes. You may not realize it, but you're a loyal brand user.

Posted by Yin Chang on May 20, 2009 at 02:03 AM CDT #

Great points, Yin.

Posted by David on May 20, 2009 at 02:14 AM CDT #

Overall I think you make a strong argument but I was curious about the impact of word-of-mouth in bringing in profitable customers. I followed the link trail from your article and came across this: http://www.womanz.org/wp-content/uploads/2008/03/hbr-oct-2007-value-of-wom.pdf

Posted by Alexander Pellow on May 22, 2009 at 03:53 AM CDT #

True enough, Alexander. From the document you mentioned I like the quote, "the value of any one customer does not reside only in what that person buys. In these interconnected days, how your customers feel about you and what they are prepared to tell others about you can influence your revenues and profits just as much."

Posted by David on May 22, 2009 at 04:03 AM CDT #

it is also the best way to make your company profitable: force the discipline of critical thought on the organization. Go beyond applying obvious remedies of discount cards, and develop a truly brand-true, strategic program aimed not just at developing customer loyalty, but of developing
profitable customer relationships

Posted by Business Opportunities on October 15, 2009 at 10:32 PM CDT #

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David Dorf, Sr Director Technology Strategy for Oracle Retail, shares news and ideas about the retail industry with a focus on innovation and emerging technologies.


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