It’s a little rude to pick at your clients, but we have good news—basic theories of economy did it for you. According to these theories, consumers are opportunists who want to maximize the value of each transaction for themselves. It may seem like we are on the market of ultimate competition, where there’s no place for customer loyalty. But we also observe that increasing customer retention by 5% can lead to a boost in profits of between 25 and 95%. Maybe loyal customers still exist?
What is customer loyalty?
You may associate the term ‘loyalty’ with loyalty programs and all those plastic cards that fill your wallet. However, you need to think bigger than that. The scope of loyalty begins with the first purchase and lasts through all following transactions throughout the customer lifecycle.
From the retailers’ perspective, loyalty is ultimately about making current customers come back and buy again.
What to expect from loyal customers
Loyalty allows to maintain the relationship between the retailer and the customer for their shared benefit. To better understand the nature of loyalty in retail, let’s break it down into six elements.
The first element of loyalty is being listened to by customers. Customers may exhibit their loyalty, for example, by following retailer’s posts on social media or subscribing to the newsletter. Their loyalty will have a measurable impact.
From the retailers’ perspective, it’s the loyal customers who are their audience, the most responsive and valuable one.
The second element of loyalty is recognition. As mentioned in the introduction, customers are smart; they won’t automatically buy in the same store all the time.
Loyalty, however, means that the shop where they already bought something in the past has a greater chance to be taken into consideration during their next purchase. Its advertisement has a greater chance to be noticed.
The website of such a store may even become the starting point of the customer’s research. A well-established retailer may observe even half of their traffic coming from direct, meaning that users remember the name of their website and type it in their browser windows.
Direct traffic is one of the top revenue sources for e-commerce.
Customers want to receive the product they are paying for and they want to buy from a store that delivers satisfactory level of service. In the case of returning customers, if their previous experience was positive, you can take trust off your to-do list.
Usually, traffic from returning visitors enjoys twice the conversion rate of the new ones. Moreover, it can be observed that conversion rates grow in time. Retailers who serve their customers well can expect this KPI to improve steadily due to greater level of trust among their consumer base.
The fourth element is positive reviews and recommendations. 84% of people trust online reviews as much as personal recommendations from friends and family. The message spread by customers can significantly impact other people’s willingness to buy there. Loyal customers may even stand by their favorite stores in online disputes. It can be commonly observed that negative comments appearing on brands’ social media profiles are answered by other users who share positive experience.
This phenomenon is called advocacy.
When customers are confronted with two offers for the same product at the same price, loyalty becomes the decisive point. Moreover, even if your price is not the lowest on the market, the customer will most probably buy from the retailer they already know. They may be willing to make a small personal sacrifice in order to feel safe and be sure that they will get exactly what they want.
Shoppers also react to benefits offered to loyal customers, like free delivery or discount for the next purchase. This means that retailers who master loyalty and win their customers’ preference may generate higher margins on sales.
Numerous studies report that keeping a current customer costs five times less than acquiring a new one. In fact, the digital market in many countries has become so saturated that advertising costs grew to the level where acquisition of new customers costs more than the revenue they bring to the company. One-off transactions have become unprofitable.
Therefore, the only way to make profit for the retailer is to monetize customers numerous times throughout their entire lifecycle. The most prominent researcher of loyalty in economy – Frederick F. Reichheld – claims even that “an increase in customer retention rates of 5 percent increase profits by 25 percent to 95 percent”.
Loyalty in a retailer’s marketing strategy
Communication to current customers enjoys better KPIs than to new customers, including open rate, CTR or conversion rate. Ultimately it also brings greater ROI. Does it mean that retailers should shift all marketing resources onto their current customers?
Let’s go back to the definition of loyalty. It was said earlier that the scope of loyalty begins with the first purchase and lasts over all following transactions throughout the customer lifecycle. However, without adding new customers to the pool, even if the best loyalty program is in place, the customer base will eventually run low and retailer’s ability to generate profit will decline.
As a retailer, you need to have a balanced marketing strategy that acknowledges customer acquisition and retention:
- Customer acquisition will include the new visitors of a retailer’s webpage. Marketing in this segment focuses on increasing brand awareness. The main goal of acquisition is growth of the customer base.
- Customer retention focuses on returning visitors, making sure the customers maintains their relationship with the company. Customer retention allows to increase the retailer’s profitability.
There’s no loyalty without relevancy
Loyalty does not mean that customers automatically make every purchase in the same store. It does, however, give the retailer a chance to be considered or even preferred by the customer.
Retailers need to be relevant to their target consumers, especially the loyal ones. Loyalty is a constant reminder to sustain a long-lasting relationship.