Building your 'customer portfolio.' - how to foster customer loyalty

Nation's Business, Dec, 1996 by Michael Barrier

Savvy businesses cultivate customers' loyalty because it's more cost-efficient to keep them than to replace them.

When you drive your car into one of the six Time-It Lube locations in Shreveport, La., for an oil change, an employee punches your license-plate number into a computer. Immediately. says owner S. Todd Burns, "it comes up as a resale customer or as a new through follow-up inquiries. They have moved, for instance, or sold the car.

Repeat business "is like compounding interest," Burns says. Because his business is based largely on repeat customers and new business brought in by word of mouth, he doesn't have to spend much money on customer who has to be added to the computer program."

Once customers have been added to the program, Time-It Lube does its best to bring them back. "If a customer is a very frequent user of our services, he may not get a reminder notice" that service may be due, Burns says. "But if it's been over 113 days-we established that number through trial and error, basically--a notice is automatically generated."

One lure the company employs is a frequent-user card. The third time a customer comes in within a year, the card is good for $3 off the usual service price of $24.95; a fourth visit brings a $5 discount.

The result? About 90 percent of his customers return, Burns says. Among those who don't, many cite reasons that are beyond Burns' control, as he has learned advertising. He has calculated that it costs him much less to retain customers by sending reminder notices and frequentuser cards than he would have to spend on advertising to attract first-time customers.

Other business people in a variety of industries have been making similar calculations and reaching the same conclusion: It typically costs much more to acquire new customers than to keep current ones.

"In the industries we've looked at," says Patty Knapik, a vice president with the East Coast practice of REL Consultancy Group, in Harrison, N.Y., "the acquisition cost has been three to five times larger than any retention cost."

Many companies that aren't aware of that disparity "accept churn as a standard operating cost," Knapik says, to the point that 50 percent annual turnover can be regarded as an excellent performance.

Relatively low retention costs are not the only advantages derived from loyal customers. It usually costs less to do business with them than to serve new customers because they know more about your company. "Loyal customers are usually more costefficient for you to process," Knapik says, and usually pay you more reliably---"a productivity hit and a cash-flow hit."

They also tend to be less price-sensitive than more fickle customers. "Loyal customers don't care so much about saving a penny or a nickel or a dollar," says David L. Whiting, president of Athletic Bag Co., a 150-employee company in Salt Lake City.

In such ways, customer loyalty translates directly into higher profits. Says Duncan McDougall, a principal at Mercer Management Consulting in Boston: "Companies that are successful in customer retention are those that understand that their most important assets are not their products or their services, but their customers. They understand that they need to manage their 'customer portfolio' as closely as they would manage any other asset."

The first step toward enjoying the fruits of customer loyalty is, of course, to earn it, by providing something that will attract such loyalty. "You can send out all the reminder notices that you want," says Time-It Lube's Burns, "but if you don't make your customers feel comfortable when they enter your facility, and have a clean facility, and have competent people servicing their cars, they're not going to come back."

In large part, cultivating customer loyalty means doing what good businesses always do-meeting customer needs--but with a shift of emphasis: away from sales and marketing, in particular, and toward customer service; away from discount coupons for new customers, perhaps, and toward rewards for loyal customers, as with Time-It Lube's frequent-user cards.

Building a "portfolio" of loyal customers also requires taking actions and adopting attitudes more specific to that effort. Here are some guidelines:

Assess each customer's value accurately.

"The 80-20 rule really does apply to most businesses," McDougall says. "Frequently, 70 or 80 percent of a firm's profitability is generated by only 20 to 30 percent of its customers."

Consider the Taylor & Fenn Co., a 137-employee foundry in Windsor, Conn., that makes ferrous sand castings--specialized, short-run metal parts used by other companies in making specialized machines such as pumps and turbines. Taylor & Fenn has about 450 customers, says Edgar B. "Ted" Butler Jr., its president, yet just 67 of those customers-about 15 percent of them--produce 85 percent of the company's sales. "The greatest opportunity for new business," Butler says, "is with existing customers."

Singling out the customers you most want to keep-and, of those, the ones most likely to leave unless you give them your close attention--is critical to a successful retention effort, says Jim Barnes, a senior vice president and practice director with REL. "If you think that everybody is equally likely to leave you, you look at your customer base and say, "There's no way I can spend the same amount of time on every customer to do this.'"