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BETSY VAVRIN

Customer loyalty is at an all-time low. Companies offering both products and services have focused on acquiring new customers at the expense of the ones they already have despite the fact that it is more costly to replace customers than it is to keep them.

So, how do you keep them? First, you need to determine who you should keep. It is possible that you do not want to keep every customer you have. Some of your customers are slow payers. Others come in the door for the low-rate introductory offer, and defect after three months. These are customers to whom you do not want to direct your customer retention efforts.

For each of those customers, however, there are probably three to five others who are eligible for your best efforts. These are the customers who do not refinance their home loan at each interest rate dip. They aren’t constantly calling your cable TV company for unnecessary service calls. They haven’t moved their market accounts from stocks to bonds, depending upon what happened on Wall Street yesterday.

These are your most profitable customers. Unless you recognize this and treat them accordingly, they may wake up someday, and because of a friend’s suggestion, an ad in the paper, or just “intuition,” decide it’s time to move on.

Before this happens, take some time to assess your customer base. Whether your company is a bank, an Internet service, or the local jewelry store, you can profit from finding out who your customers really are. Similarly, museums and other nonprofit organizations must know who their donors are and understand the needs of their members. This is the first step in deciding which customers, donors, or members are worth keeping.

Remember, the value of a customer increases over time. For example, the cost to acquire a typical bank card customer has been valued at $55. It will take the first year of customer purchases (and interest costs) to pay for his acquisition. It won’t be until the second year that the financial institution realizes its first profit. From there on, the benefits increase almost exponentially. The servicing costs are reduced. The customer understands how to read his statement without unnecessary calls to customer service. He knows his statement cut off dates and plans his purchases accordingly.

Also, as his tenure with your company increases, so does his satisfaction and likelihood of referring other customers, who are consequently acquired without the usual marketing, advertising and sales costs. In addition, as a loyal customer, he is more inclined to pay full price, and not scout out discounts, than are first-time buyers. Identifying your key loyalty prospects also reduces your marketing costs. Once you have determined who your best customers are, you can more efficiently communicate with them via direct mail and other low-cost marketing programs that don’t include loss-leader incentives you may have to offer to new customers.

Learning who your most profitable customers are will take some time. For most companies or organizations, it is an involved process, usually looking at a number of customer, donor or member attributes. These may include any or all of the following: average account size or donation; average account or donor age; date and size of first transaction or donation compared to consequential ones; and actual defection or inactivity rates. This will give you a situation analysis of what your donors or customers look like.

Using the information from your situation analysis, you can begin to segment your customers or donors into categories. Even without a profitability analysis, you can determine “best” to “worst” customers or donors depending on the size of the account or donations, number of years with your organization, and the date of their last transaction or donation. In the end, it is the “best” customers who should receive your loyalty message.

Once you have segmented your customer base determined who is a profitable customer or donor you then measure their lifetime value. This is a real eye-opener. You will see how much these customers drive your profitability statements, or how these donors drive your capital campaign’s success. You will learn how much it means to lose them, but mostly how important it is to keep them.

Those that are worth keeping are good targets for your loyalty programs. You also need to determine what gives meaning to them. Why have they stayed with you and not left? There are many ways to determine meaning. The best way is to ask. This means research. Focus groups. Surveys. Time.

More about designing customer loyalty programs in Part II, next week.

Betsy Vavrin is president of SMC Marketing in Studio City. Her company specializes in developing customer retention programs for national multi-unit companies, nonprofit organizations, and smaller single-site businesses and retailers.

Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1941 with feedback and topic suggestions.