The “Three Rs” of Customer Loyalty

Studies show that the longer customers are loyal, the more profitable they become. Why? The answer has to do with what are known as the three Rs of customer loyalty: retention, related sales, and referrals.

Retention

The first R of customer loyalty is retention. An ongoing relationship with a customer creates a steady stream of revenue over time as the customer continues to buy products. The costs associated with marketing decline. In many cases, so do the costs of actually serving the customer, because he or she has become familiar with the company, its product lines, and its procedures.

Related sales

Loyal customers also generate related sales, or sales of new products and services to existing customers. The profit generated by related sales is greater than it is for selling to new customers. The forward-thinking company develops new products by listening to its loyal customers. Loyal customers are therefore more likely to buy because the new product has been designed to meet their needs, and because they already have a degree of faith in the company.

New sales to existing customers are less costly because they require less marketing, no new credit checks, less paperwork, and less time. Furthermore, loyal customers are often less sensitive to price than new customers.

Referrals

Positive referrals are the best kind of marketing—and they’re free! Positive customer referrals are vital to profit and growth. Research suggests that satisfied customers are likely to tell five other people about a good experience, while dissatisfied customers are likely to tell eleven other people about a bad one. From your own experiences as a consumer, you probably know that personal referrals carry much more weight than traditional marketing does. And research has shown that when customers have been asked to provide a referral, most of them become more loyal.

The three Rs and your internal customers

The three Rs also come into play when your job involves serving internal customers—other individuals, groups, or teams within your organization. The longer a positive relationship with an internal customer lasts, the more you both accomplish together. As a long-term relationship with internal customers grows, the relationship becomes more and more effective, which in turn affects your company’s profitability.

In a truly effective internal relationship, a synergy forms. Two groups within an organization can work together to develop new products or serve a customer in increasingly innovative and creative ways.

When marketing budgets ignore the three Rs

The figure “New versus loyal customers” represents a typical marketing budget. As you can see, only a small fraction of the entire budget is usually devoted to maintaining loyal customers.

Sadly, many companies today focus nearly all their energy and money on getting new customers. They promise low introductory rates and sign-up incentives, and, of course, they spend millions on marketing and advertising.

Moreover, the reward structure within many companies is geared almost exclusively to luring new customers into the fold. The biggest incentives often go to employees who bring in new customers, not to those employees who work hard at keeping loyal internal and external customers satisfied.

FIGURE 1

New versus loyal customers

Marketing budgets like these are driven by the mistaken assumption that if you want to make a profit, you must increase market share. This traditional marketing approach focuses on the four Ps—product, price, promotional activity, and place (distribution channels). It leads to the notion that any customer is a good customer—which isn’t accurate, as we’ll see in the next section. And it neglects the importance of the three Rs.