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Product Details
| ISBN-13: | 9781564146953 |
|---|---|
| Publisher: | Red Wheel/Weiser |
| Publication date: | 11/17/2003 |
| Pages: | 224 |
| Product dimensions: | 6.00(w) x 9.00(h) x 0.46(d) |
| Age Range: | 3 Months to 18 Years |
Read an Excerpt
CHAPTER 1
Why Customer Loyalty?
American business can be fickle. People change their preferences. People change their minds. Technology, the Internet, and overnight delivery to anywhere in the country has changed the rules of competition. Mom-and-pop corner stores must now compete with businesses a thousand miles away.
Getting customers to come back again and again is the most important endeavor of every business. No business can be successful by continually dealing with new customers. Repeat customers are the source of all profit, and profit allows a business to grow and prosper.
Chuck E. Cheese's Learns the Value of Repeat Customers
In 1977, Nolan Bushnell, the inventor and founder of the Atari video game company sold his company for a fortune. Bushnell opened a new business called Chuck E. Cheese's. The restaurants are indoor mini-amusement parks that sell pizza. Located in shopping malls, they are equipped with video and other games. Do you remember that at one time, these restaurants were part of a national chain and Bushnell was the franchiser? The restaurant's target audience was birthday parties and other special events. Every kid that lived near a Chuck E. Cheese's wanted to have his or her birthday party there: Kids loved the restaurants. Parents hosted their kid's birthday parties at these restaurants, but the parents hated it.
Back when the franchises were becoming increasingly popular, the pizzas were terrible and the service was worse. Bushnell admitted that the pizzas they were serving were mediocre at best, but he had no plans for improving them. He said it didn't matter because he didn't care if anyone ever came back to his restaurants. He thought he could base the success of his restaurant on an endless stream of onetime customers. His plan was flawed because word of poor service and terrible pizza traveled quickly. Despite the pleas from their children parents refused to be subjected to Chuck E. Cheese's.
Instead of an endless stream of new customers, every customer that visited Chuck E. Cheese's told others about their terrible experience. Bushnell's dream collapsed shortly after it began: Negative word-of-mouth advertising ended his ability to franchise these restaurants.
Every business depends on loyal customers coming back again and again. Some of Chuck E. Cheese's franchisees continued their operations, independent of Bushnell, with a philosophy of building a repeat customer trade. Many of these businesses have prospered by depending on loyal customers. Businesses cannot prosper or even exist without repeat customers. The Chuck E. Cheese's establishments that adapted and made a commitment to repeat business are thriving today. Today, kids love having their birthday party at a Chuck E. Cheese's and their parents love it, too.
The value of customer loyalty is not situational or temporary. Loyal customers are always valuable. Customer loyalty is never the problem; it is always the solution. Customer loyalty levels the playing field; it is the ultimate competitive advantage.
Customer loyalty is an activity; it is not an emotion or an opinion. When customers buy from you again and again and tell the world why everyone else should buy from you, they are demonstrating loyalty. Customer loyalty is the specific activity of buying from you or recommending you to others on a repeat basis.
Customer Loyalty Is Not an Opinion
When I was a kid growing up in a small Alabama town, there was a little grocery store that was the only place to shop. Horace's wasn't much bigger than a modern convenience store, but it was the only grocery store within 15 miles of our town. Most everyone in our community did their shopping at Horace's. I do not remember anyone ever saying that Horace's had the best prices, selection, service, or the best of anything; simply, people shopped there because it was closest. If someone was passing through town and asked where a grocery store was, the answer had to be Horace's. If nothing else, Horace's had a loyal clientele because the same people came back every week. The family that owned Horace's enjoyed all the benefits of loyal customers. The family made a fortune because they were the only store in town.
When suburbanization brought a real supermarket to our town, the community suddenly had a choice of where to shop. The new supermarket was much larger, cleaner, and had more selection. Horace's was forced to either adapt or die. Horace's had never done anything to create loyalty except be the only grocery store in town.
Before the new supermarket moved in, the people of our town were demonstrating loyalty by shopping at Horace's every week. Their opinion of Horace's didn't make one whit of difference. The shoppers voted with their pocketbooks and the owners counted their votes in the store's cash register.
Horace's owners might have been able to do a lot of things to compete with the supermarket chain store, but they only did what they had always done. Over a relatively short period of time, the people of our town began doing most of their shopping at the new supermarket.
Horace's still had a good location, but the owners went from making a fortune to making a living. The people of our town still had a good opinion of Horace's, but given a choice, they preferred to shop elsewhere. Loyalty is not an emotion or an opinion, it is only an activity.
All Profit Comes From Loyal Customers
Repeat customers are the only source of profit for any business. It is not until a customer buys from you a second, third, or fourth time that any profit is earned. The cost of attracting and learning how to serve first-time customers consumes any potential profit that might be made.
Modern accounting methods are very precise in the measurement of costs, expenses, worth of inventory, and the relationships of these values. However, modern accounting methods are nearly worthless when it comes to measuring the value of customers and their relative loyalty. Your accountant or accounting department can tell you to the penny how much profit you made last year. Unfortunately, accounting principles do not reveal and, in fact, hide which customers produced the profit.
For example, I shop for office supplies at Office Depot. They have a great selection, good prices, and their store is close to my home-office. Office Depot advertises on television and in the newspaper and offers their products for sale on the Internet. They also send advertisements through the mail and have a display rack in the front of their store with flyers that describe their current specials. The Office Depot at which I shop is open from 8 a.m. till 9 p.m. The store is well staffed with bright and helpful employees.
As a writer, I use a lot of printer cartridges, paper, and other office supplies. When I visit Office Depot, I do not need an employee to help me find what I'm going to buy because I am already familiar with the location of the supplies I need. I usually shop mid-morning during the week, so its extended hours during the week and weekend hours of operation are of no interest to me. I pay for my purchases with cash, so I do not use the credit terms they offer. I am pleased with Office Depot and visit the store regularly. Its advertisements, special offers, and Internet store are enticements that do not really apply to me. I am a loyal customer of Office Depot but I use very few of the added benefits they provide.
When Office Depot's executives report to their stockholders through their annual report, I am not mentioned. The few thousand dollars I spend with the company each year are mixed in with the rest of the $11 billion in revenue. The executives and stockholders cannot see that most of their expenses in additional hours, advertising, Website maintenance, and employee training are wasted on me. If all of Office Depot's customers were like me, it could save a fortune. I'm not a big customer for Office Depot, but on the basis of an expense to revenue ratio, percentage-wise, I'm a very profitable customer for this company. Modern accounting methods will never disclose this profitability. All of Office Depot's customers, just like everybody else's customers, must share the burden of the company's total expenses.
All of this is to say that modern accounting methods do not fairly describe the true profitability from a loyal repeat customer. However, Frederick F. Reichheld, loyalty expert and author of The Loyalty Effect, reports that even a marginal increase of just 5 percent repeat business produces a whopping 60-percent increase in profit.
When your customers come back to buy from you a second, third, or fourth time, they already know where you are located and what service and products your business provides. You don't have to educate these people about your business because they already know, so you do not have the expense of advertising in order to attract them. These repeat customers are easier to do business with because of what you know about each other. Time and money are saved and you earn a profit where profit did not previously exist.
The Value of Predictability
We saw how Horace's inability to adapt was its downfall. Adaptability is important, even critical, to our continued success, but we also must be able to predict the behavior of our customers. Predictability is an important benefit of having loyal customers. Predictability allows a business to maximize its resources today and plan for the future. When you can predict your customers' buying habits, you are also able to predict staffing, inventory, and every other aspect of your business.
Do you like hot dogs?
Dean was let go from his corporate position with Sears when the company was going through one of its many downsizing efforts. As a result, he bought a fairly elaborate and sophisticated hot dog cart and began an entrepreneurial adventure that far surpassed his fondest expectations. No one wants to be fired from their job, but Dean took it in stride and said he looked forward to being his own boss even if it was only as a hot dog vendor.
Dean towed the sophisticated hot dog cart behind his car to a spot in front of the courthouse every day it was not raining or too cold. On the way he stopped to buy hot dogs, buns, and other supplies. When he first started his business, he usually bought too many hot dogs. On a good day he would sell 50 to 60 hot dogs and would have to throw away as many as 20 to 30 hot dogs and buns. Dean only wanted to offer the freshest product and refused to sell hot dogs that were a day old. You don't need to do the math to understand his problem. He was buying too many hot dogs for the amount of customers he had. His inventory costs included the price of 90 hot dogs and buns, but he only had the revenue from the sale of 50 or 60 hot dogs. He was spending too much for inventory, but on the other hand, he didn't want to run out of hot dogs to sell. Dean thought that if he turned a customer away because he was out of hot dogs the customer might never come back again.
Fortunately, Dean very quickly began to predict his inventory needs by noting how many customers he had each day. Not only did this predictability allow him to regulate his inventory, he also was able to determine his most productive sales hours. He refined his calculations for time of year and weather conditions. Pretty soon Dean could predict within three to five hot dogs exactly how many hot dogs he would sell on a given Monday, Tuesday, Wednesday, Thursday, or Friday. Because Dean had developed a loyal (predictable) customer base, he purchased almost the exact amount of product he would sell and he knew which were his best hours of operation. His inventory cost became a much smaller amount in relation to his sales. Dean had very little wasted product, and so his profits doubled. Not only did his profits double, but he was working fewer hours because he knew when his loyal customers would show up hungry.
It is interesting to note that in his first year of business, Dean was earning more money selling hot dogs than he ever did working in corporate America.
Dean's hot dog stand is a simple business model but it makes the point that the predictability that comes from repeat purchasing by your customers will substantially increase your profit, as well as reduce the time it takes to make it.
The Price of Attraction
Predictability is only one advantage to having loyal customers. The cost to attract a new customer is a large expense that is affected by customer loyalty. General Motors recently disclosed that it spends as much as $2,500 to attract each new customer. All of its customers are not new, but General Motors spends considerable sums of time and money trying to attract more than 20 percent new customers each year. The $2,500 General Motors spends on each of these new customers cancels out every penny of potential profit.
The average price of a new General Motors automobile is approximately $20,000. According to its annual reports, GM's earnings are traditionally less than 10 percent of its revenue. Ten percent of $20,000 (its average-priced automobile) is $2,000. That means its average profit per automobile is $2,000, while its average cost to attract a new customer is $2,500. General Motors spends $500 more to attract each new customer than it can hope to make. In order for General Motors to make any profit from these people, it has to sell them a second, third, or fourth automobile.
Advertising, signs, promotions, and special sales are just a few of the additional expenses of attracting new customers. If you consider all of your expenses in trying to attract new customers you'll discover that you are not making any profit from new customers on their first purchase. As with General Motor's customer, your customer has to come back a second or third time for you to make a profit.
The cost to attract one new customer
The customers you have today know your business: They know your location, your selection, and how you do business. You may want to advertise to your current customers to inform them of a sale or special promotion, but generally your current customers already know all about you. How much does it cost to attract new customers that don't know about you?
You don't need a billboard to attract your loyal customers
Johnny's Steak House is a terrific restaurant located in northern California. The restaurant is situated not far from Interstate 5, but you can't see it from the highway. This restaurant has enjoyed a loyal clientele of local folks for many years. Recently, a large billboard sign was erected on the Interstate that posts directions to Johnny's Steak House. The billboard sign costs the restaurant's owner $1,000 a month to rent. When a new customer sees the sign and comes into Johnny's, the owner doesn't make a profit. He doesn't make a profit until enough new customers come in each month to pay for the sign. He didn't need the sign for his regular customers because they already know that Johnny's is a terrific steak house and they know where it is located. The sign is only needed to attract new customers.
Once someone has been to Johnny's they know where it is, so the directions on the billboard are no longer necessary for them. When new customers come back a second, third, or fourth time, the restaurant makes a profit. There is no cost, or at most a reduced cost, to attract repeat customers; consequently, they are the only source of profit for a business.
The Ease of Doing Business
Predictability and a reduction in costs to attract new customers are not the only advantages to having loyal customers. There is a third advantage that helps reduce cost in dealing with customers. New customers have to learn how to buy from you, and teaching them takes time. You have to learn how to service new customers, and learning takes time. New customers may have bad credit habits, high returns, and a million other problems that need to be overcome before you can figure out how to best work with them, and overcoming these problems takes time. You must learn how (and if) these new customers are going to pay. You must learn what their delivery requirements might be. What styles or selection will these new customers prefer? Will these new customers be returning products or changing their minds on a regular basis? How demanding are they of service? How responsive are these new customers to special sales or promotions?
Only after you learn about them will you be able to deal with these new customers effectively. All this extra time costs you money — time is money — and all your potential profit is spent on learning how to deal with these new customers.
Renewing a Lease Is Easier
Charlie is a retired real estate agent in southwest Florida who owns several condominium units that he rents on an annual basis. When Charlie has a vacancy in one of his units, he places an advertisement in the local newspaper. He screens phone conversations with potential renters and only shows his property to those he thinks will be good tenants. When he shows the property, he completes a credit application and tries to learn as much about his prospective renter as possible.
(Continues…)
Excerpted from "Why Customers Come Back"
by .
Copyright © 2004 Manzie R. Lawfer.
Excerpted by permission of Red Wheel/Weiser, LLC.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.
Table of Contents
Introduction,
Chapter 1: Why Customer Loyalty?,
Chapter 2: The Story of Customer Loyalty,
Chapter 3: People Do Business With People,
Chapter 4: Differentiation,
Chapter 5: Value and Assurance,
Chapter 6: Effective Communication,
Chapter 7: Focus,
Chapter 8: How We Do It,
Chapter 9: Empowerment and Accomplishment,
A Final Word,
Bibliography,
Index,
About the Author,