Saturday, January 9, 2010

Does It Cost Less to Serve Loyal Customers?

This is a continuation of the two previous blogs and is based on the article titled "The Mismanagement of Customer Loyalty" in the Harvard Business Review by Werner Reinartz and V. Kumar. The first claim they examine (that is normally assumed valid for loyal customers) is that it costs less to serve loyal customers.

Recall that this research is based on examining the buying habits of 16,000 customers in four companies in four different industries over a four year period. The four companies are in retail grocery (French), corporate service provider (US), direct brokerage firm (German) and a mail order company (US). The logic that is most often presented as the basis that loyal customers cost less is:
1. Upfront costs of acquiring loyal customers is amortized over a large number of transactions.
2. Loyal customers need less hand-holding and it is cheaper to deal with them.
3. Loyal customers are more familiar with a company's processes and can resolve more problems on-line without needing the direct intervention of a technical assistant.

These researchers found that "in none of the four companies we tracked were long-standing customers consistently cheaper to manage than short-term customers." In the case of the corporate service provider the loyal customers were actually more expensive to serve. They point out that the corporate service provider provided dedicated sales and service teams. One of the observations that they made was that small disparity between the cost-to-sales ratio for recent and long-time customers.

While this research is not comprehensive in terms of being representative of the industries it studied or industry taken as a whole, it appears to be well planned and comprehensive in terms of a reasonable time frame to test this claim that loyal customers cost less to serve. Of equal importance is the fact that they got very similar results in very disparate industries. It is likely that there are companies and industries that do have lower costs from loyal customers than they do from recent customers.

The bottom line is that many companies assume that their loyal customers are more profitable without taking the time to add all the many benefits that they offer the loyal customers. If they would take the time to analyze the true costs of serving loyal customers versus recent customers, they might find that while a loyal customer offers the potential of a long-term revenue stream, the cost of maintaining that stream may exceed the profit derived from the products and services being provided.

As a closing note I have had several comments regarding the study with some suggesting the study is flawed. Since I am not privy to the details of the study I cannot provide assurance one way or the other about its accuracy. One comment appeared to suggested that loyalty and longevity were not the same. While I agree with the semantics, I cannot fathom how one can describe loyalty without including a time component.

1 comment:

Anonymous said...

Thank you very much for your blog. I was wondering if this would also apply to health care industry the same way specifically a clinic or a hospital where the business unit might have captured patient population due to insurance enrollment such as HMO or PPO.


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