What is the Value of Loyal Customer Relationships?

2 min read

“Goodwill is the one and only asset that competition cannot undersell or destroy.”  –Marshall Field

“Loyalty is what we call it when someone refuses a momentarily better option.”  –Seth Godin

When business owners think about growing a business, they often think about adding new customers.  But one of the best routes to revenue and profit growth is maintaining–and expanding–your existing customer relationships.

In other words, if you’re looking to grow your business, developing loyal customers really pays off.

The data about the value of long-term customer relationships can be eye-opening.  Fred Reicheld, of the management consulting firm Bain & Company, did research on what this value looks like:

‘Across a wide range of businesses, customers generate increasing profits each year they stay with a company. In financial services, for example, a 5% increase in customer retention produces more than a 25% increase in profit. Why?

Return customers tend to buy more from a company over time.  As they do, your operating costs to serve them decline. Whats’ more, return customers refer others to your company.

And they’ll often pay a premium to continue to do business with you rather than switch to a competitor with whom they’re neither familiar nor comfortable.’

In addition to the growing profitability of existing customers, intuitively, it’s also clear that it’s less expensive to keep existing customers than to add new ones.  There are no customer acquisition costs.

As Harvard Business Review notes:

‘Depending on which study you believe, and what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one.’

And of course, as Bain & Co notes, when happy, long-term customers refer new customers to your business, there are no acquisition costs there either.

In fact, as the value of loyal customer relationships has become increasingly clear, a terminology has developed.

Customer lifetime value (CLV or often CLTV), lifetime customer value (LCV), or life-time value (LTV) are all interchangeable acronyms for this value, and refer to either all revenue or net profit derived from the full course of a customer relationship.

The focus, of course, is on increasing CLV.  From increasing engagement, to reducing ‘churn’ to focusing on acquiring the right customers in the first place, there are lots of ways to do this.  But that’s the topic of another post.