Loyalty economics

The first step is to calculate the lifetime value of your average customer. (If you’re unfamiliar with this procedure, you can learn about it here.)

Using that average as a baseline, tally up the difference in lifetime value for promoters, passives and detractors. Here are the factors you’ll need to measure and take into account:

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Customer lifetime value

Retention rate. Promoters generally defect at lower rates than other customers, which means that they have longer, more profitable relationships with a company.

Annual spend and share of wallet. Promoters increase their purchases more rapidly than detractors, because they tend to consolidate their purchases with their favorite supplier. They are more interested in new offerings and brand extensions than detractors are.

Pricing. Promoters are often less price sensitive than other customers, particularly detractors. Examine the market basket of goods or services purchased by each group over a six-to-twelve-month period and then calculate the margin on each basket. While many loyal customers expect “the best deal” you have to offer, others stay with you for reasons other than price. It’s important to know which of your promoters are price sensitive and what impact that has on your financial performance.

Cost efficiencies. Promoters typically require less in sales, marketing and advertising costs than other customers. Moreover, their average order size is typically larger, leading to lower transaction costs per unit of revenue. They generally have fewer complaints and account for fewer credit losses. Their positive attitudes have a hard-to-quantify but important effect on boosting employee morale and productivity.

Word of mouth. Promoters generate 80 percent to 90 percent of referrals. Quantify (by survey if necessary) the proportion of new customers who selected your firm or product because of reputation or referral, and allocate the value of those customers to promoters. Conversely, detractors account for most negative word of mouth, so allocate the cost of this drag on growth to them.

These factors can add up to a significant difference. A Bain study of affluent banking customers, for example, found that promoters are worth an average $9,500 more to a bank than detractors.

Chart06-affluent-promoters

This kind of rigorous economic analysis isn’t easy, but it can help any company gauge the likely return on investments aimed at creating more promoters and fewer detractors.


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