By Bob Salvas
Several years ago, I read an interesting article in the Wall Street Journal titled Why a Loyal Customer Isn’t Always a Profitable One.
The main point of the article was that while a business owner might define a customer as ‘loyal’, that same customer might not
actually be profitable for the business. The article stated:
“…research consistently finds that profitable customers tend to make up only around 20% of a company’s customers. Break-even
customers represent around 60% and unprofitable customers around 20%.”
This research seems to be in line with principles set forth by Italian economist Vilfredo Pareto over 100 years ago. It is commonly
known today as the Pareto Principle or the 80/20 Rule. It means that 80% of the benefit from anything is driven by 20% of the effort.
Or in this case, 80% of your business profits are generated by 20% of your existing customers.
The obvious conclusion here is that not all customers are equal in their importance to your business. And if that is the case, shouldn’t
it follow that we should treat different customers differently? Please understand that I am not talking about treating any customers
badly. 100% of your customers should be treated with respect, professionalism and kindness. Rather, I am talking about the time
and money you invest in each customer. Think about it in economic terms: if you have one customer who buys 1 million widgets from
you annually and one customer who buys 100…does each customer pay the same price per widget? Probably not.
So, when it comes to thanking a customer for their business (be it at the holidays or other times of the year), should you get
them all the exact same branded gift? Probably not.
Many businesses say they cannot afford to send an expensive gift to all their customers…and they probably shouldn’t. Rather than
lowering the cost of the gift that goes to everyone, they should instead take a hard look at their customer list. If they can identify
the top 20% of their customers, they should consider sending them the nice gifts and maybe just send a personal note (or a smaller
gift) to that middle 60%. By the way, always remember to offer the gift or message in a sincere way without asking for additional
sales or additional referrals. The request for additional business takes away from the spirit of giving and taints your efforts. It may
even have the opposite effect for what you are trying to accomplish.
Some businesses will see this type of loyalty/gratitude strategy as a waste of time and money and spend 100% of their marketing
budget in pursuit of that new customer. They do not see the long-term benefits of retention and referrals that comes from appreciating
their existing customer base. Other businesses may understand those benefits but over-spend by sending the same gift or message to
all their customers. They do not see that the bottom 20% of their customers are probably costing them money and the top 20% are
worth their weight in gold. You must find the middle ground between these two extremes. The key here is balance. Invest in your current
customers but be selective in how you do it.
The bottom line to being in business must still be the bottom line. A smart loyalty/gratitude strategy executed and balanced can bolster
that bottom line in more ways than you could ever imagine. Some of those ‘loyal’ customers can become some of your most profitable!