The Return of Customer Loyalty
Why now, more than ever, you should be focusing on keeping the customers you already have
It wasn't so long ago that everybody thought customer loyalty was dead. I remember that back in the 1980s I'd wake up each morning wondering, "Which customer am I going to lose today?" Price was everything. Customers would switch suppliers for pennies.
In my messenger business, we had 20% customer turnover every year, meaning we had to bring in new business worth 20% of sales just to stay even. We'd lose accounts to competitors who we knew wouldn't survive six months at the prices they were offering. Customers didn't care. They'd say, "We'll come back when they go out of business."
There was no customer loyalty back then. Zip. Zero. Nada. There was loyalty only to price.
Funny how times change. Customer turnover in my delivery business is now about 8%; in my archive-retrieval business, it's practically zero. Customers want to stay with us these days. We hold on to them even when competitors offer a lower price. It's as if customers are looking for excuses not to switch suppliers, whereas 10 years ago they were looking for excuses to leave.
Whatever the reasons for the change--and there are several--it presents a big opportunity to those who recognize it. Among other things, it means that now, more than ever, you should be focusing on keeping the customers you already have before going after new ones.
Listen, there's no better or cheaper way to build a business than with loyal customers. Acquiring new customers is expensive. Each one represents a huge investment of time, money, and talent. You'll grow faster and operate more profitably if you're adding your new customers to a solid base of existing customers.
So you always want to make the base as strong as possible. That's tough when you're losing 20% of your customers every year, no matter what you do. Then you really have no choice but to focus on finding new customers to replace the ones who've left.
In this environment, however, you have a choice. Choose to build customer loyalty. How can you do that? Here's what's worked for me:
1. Teach your customers your business. Customers may not be as price conscious as they once were, but they haven't lost interest in cutting costs. They simply realize they've already achieved most of the savings they're going to get from price reductions. There isn't much fat left to squeeze out. So they have to look elsewhere for savings.
As a supplier, you're in a unique position to show customers where they can find those savings. Why? Because you know your business better than they do. You know how they can cut costs by operating a little differently. You can help them to be smart buyers and smart consumers.
Here's an example from my archive-retrieval business. One of the first things you discover in this industry is that most people keep their records forever. Customers give a company their boxes and forget about them. There's often no reason to hold on to them after a certain number of years, but nobody checks to see what can be destroyed. Meanwhile, storage fees pile up.
We saw a chance to help our customers by developing a system whereby we enter a destruction date in our computer for every box we receive. When the time arrives, we notify the customer, who then tells us whether or not to destroy the records. We've saved some customers as much as 40% of their storage costs.
Understand, we wind up with fewer boxes as a result. So our sales are somewhat lower than they might otherwise be. But we do get compensated. Customers pay us by staying with us even when they might get a slightly cheaper price somewhere else. Over the long run, that loyalty is worth much more to the business than the extra boxes.
2. Treat established customers like new ones. There's a natural tendency to take customers for granted after they've been around for a while. You'll do anything for them when you're trying to win their business, but once you've landed the account, your attitude starts to change. By the time you go back to renegotiate the contract, you've developed a whole new set of expectations. You're not focused on making the sale anymore. Now you're thinking about getting a better deal.
It's an easy way to lose business. Why? Because you leave yourself wide open to competitors who are looking at the customer the way you did when you were starting out.
So I make sure we treat established customers the same as we did when we first met them. It's a promise I make when I'm closing the sale, and it's a way of thinking I instill in my staff. I want all of us to ask ourselves constantly how we can make our customers' lives easier.
For example, we developed a computerized service that allows customers to dial in and look up anything about their account, the records they have in storage, the status of their boxes, whatever. If we do it for them, it takes longer, and we have to charge them $1.50 a lookup. I'd prefer we didn't do any lookups. We have many more profitable ways to use our resources. By using the on-line service, customers save themselves time, money, and aggravation, and they help us reduce our costs, which makes it easier for us to maintain our prices. All of which demonstrates our commitment to treating established customers like new ones.
3. Maintain stable prices. In today's environment you can hold on to most customers indefinitely if you don't raise your prices. The problem is that costs--as we all know--have a tendency to rise. So how do you maintain stable prices without letting your margins slide?
For one thing, you can get help from your customers. You can show them how to cut their own costs and yours, too, as we did with our on-line service. But you can also ask your suppliers to help you. How? By teaching you their business.
I did that with my insurance broker. I asked him to show us how to be smart insurance buyers. He said, "There are two mistakes people make in this business. They overinsure, or they underinsure." We were overinsuring, and we were submitting too many claims, which kept our premiums high. So he had us raise our deductible and then look closely at every claim, settling some of them ourselves without involving the insurance company. On one policy we paid $10,000 in claims out of our own pocket over three years. The result: our annual premium went from $25,000 to $12,000. By paying an average of $3,333 a year in claims, we wound up saving $13,000 a year in premiums.
I give full credit to our broker, who taught us how the insurance industry works. Believe me, he doesn't have to worry about our loyalty.
There are many ways to take advantage of the opportunities created by the return of customer loyalty. Of course, there are challenges as well. It's a lot harder to sell, for example, when prospective customers are loyal to their old suppliers and tend to give them the benefit of the doubt.
I'll offer some tips on meeting that challenge in my next column.
Norm Brodsky is a veteran entrepreneur whose six businesses include a former Inc. 100 company and a three-time Inc. 500 company. Readers are encouraged to send him questions he can address in future columns.
This column was coauthored by Bo Burlingham.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.