If you’re asking yourself, “Why does customer loyalty matter?,” you’re not alone. Business leaders are asking this question more than ever before. They’re also starting to act on the truth they discover—customer loyalty is everything.
According to the LoyaltyOne 2019 Loyalty Big Picture, 71% of businesses are now investing at least 2% of annual profits back into customer relationship management and loyalty. This might not sound like much, but it is an improvement from even the recent past. The same report by LoyaltyOne found that 69% of C-suites had increased their customer loyalty spending in the last 2 years, and 55% of those intended to increase it further in the next 2 years.
But does this increased spend reflect a deep cross-organization understanding of why customer loyalty is important? At some of these businesses the culture to make this investment worthwhile might already be in place. But it’s also possible the importance of customer loyalty isn’t being conveyed with the same message and intention to every department of the business. That lack of alignment adds up to an increased spend on customer engagement technology and initiatives that might not actually translate to more loyal customers.
Here is what needs to be communicated, understood, and embraced by all departments across an organization for the benefits of customer loyalty to manifest.
Why is Customer Loyalty Important?
Why is customer loyalty and retention so important? Well, without customer loyalty and retention, what is the purpose of customer acquisition? Attracting one-time revenue might be a short-term source of cash flow, but it’s no long-term way to grow a business. The Pareto Principle, introduced by Italian economist Vilfredo Pareto in 1906, is still statistically shown to be true over 110 years later. Also called the 80/20 principle, this theory asserts that around 80% of a company’s revenue comes from just 20% of its customers. A 2017 study found that across both B2B and B2C industries, the top 20% of customers generated 67% of revenue.
This “law of the vital few” applies to loyal customers. Why? Because loyal customers do more for the business in three key ways.
How Does Customer Loyalty Affect a Business?
Customer loyalty makes customers stay longer, spend more, and refer new customers. Let’s examine each of these benefits of customer loyalty in turn.
Loyal Customers Stay Longer: According to a survey by InMoment, 77% of loyal customers purchase from the brands and companies they love for 10 years or more. 60% of Millennials (age 25-40) have already formed these loyal connections with brands.
Loyal Customers Spend More: Dan McCarthy, a professor at Emory University, and Russell Winer, New York University, found that the top 20% of a company’s customers generate 105-155% of its revenue. How is this possible? Because not every customer is profitable. Referring back to the Pareto Principle these high-performers at the top are making up for net losses among other customers.
Loyal Customers Refer New Customers: According to an annual customer referral program report by Amplifinity, the top 1% of customer advocates make 22% of the referrals, and the top 10% of satisfied customers make over 50% of the referrals.
Customer loyalty affects a business today by strengthening the foundation of success. But understanding why customers are specifically loyal to your company will also help you grow. Pinpointing the characteristics that unite your loyal customers allows you to better-target marketing spend and other initiatives that attract new customers just like them. That’s the kind of customer acquisition strategy that will exponentially grow your bottom line long-term.
Do Loyalty Programs Increase Sales?
Reward programs may increase sales, but they don’t grow customer loyalty. Why is loyalty more important than increasing sales? Because in the long run, loyalty increases sales more, and more passively for your business.
A loyalty program or reward program requires an investment of time and resources by your business. You have to devise the program to begin with, and in today’s tech-empowered world, you likely also have to invest in loyalty program technology to make it work. Then there’s the discount or promotion itself that customers earn through the program.
In scenarios where the loyalty program is the only thing attracting and retaining business, there is no long-term profitability, because the customer will rarely if ever be inspired to pay full price. In fact, customers will just be trained to wait for the discount before making a purchase. And even if they do pay full price at some point, when a cheaper or more convenient offering becomes available from a competitor, those customers will be lost.
Reward programs are a tactic. Cultivating loyalty is a strategy. As a tactical element of your strategy, loyalty programs can have a short-term use to get new customers interested in your brand, or as a benefit to reward your most-loyal customers for their support. But if the only way your company can increase sales is with discounts and promotions, you haven’t really achieved a long-term increase, just a short-term solution.
Unlock All Benefits of Customer Loyalty with Alignmint Growth Strategies
Every employee at a business must understand that customer loyalty is the biggest driver of profitability and success. Your team also deserves to understand how customer loyalty is achieved—by making customers feel seen, heard, and valued. Lastly, your team deserves a clear, repeatable, and goals-focused process for building customer loyalty across departments and customer touchpoints. The intention to build customer loyalty is not sufficient for success. Nor is increasing spending without first getting everyone on the same page about why customer loyalty is the goal.
Alignmint Growth Strategies specializes in helping companies make customer loyalty a goal any company can achieve. We achieve this first by listening and understanding the internal and external blockers that are preventing customer loyalty from already developing. Then, we define measurable steps between your current reality and the end goal.
Contact us to start the process of growing customer loyalty a little more every day, and we’ll cross the finish line to celebrate together before you know it.