The three Rs

Studies show that the longer customers are loyal, the more profitable they become. Why? The answer has to do with what are known as the three Rs of customer loyalty.

The first R of customer loyalty is retention. An ongoing relationship with a customer creates a steady stream of revenue over time as the customer continues to buy products. The costs associated with marketing decline, and, in many cases, so do the costs of actually serving the customer who becomes familiar with the company, its product lines, and its procedures.

Loyal customers also generate related sales, the second R. The profit generated by selling new products and services to existing customers is greater than it is for selling to new customers. The forward-thinking company develops new products by listening to its loyal customers. Loyal customers are therefore more likely to buy because the new product has been designed to meet their needs, and because they have a degree of faith in the company already.

In fact, the original product may generate a minor profit compared to related sales over time. New sales to existing customers are less costly, because they require less marketing, no new credit checks, less paperwork, and less time. Furthermore, loyal customers are often less sensitive to price than new customers.

Positive referrals, the third R, are the best kind of marketing—and they're free! Positive customer referrals are vital to profit and growth. Research suggests that satisfied customers are likely to tell five other people about a good experience, while dissatisfied customers are likely to tell eleven other people about a bad one. From your own experience, you know that personal referrals carry much more weight than traditional marketing.