Loyal Customers May Not Be Profitable Ones

Published 06/21/2021
Only 20% of Your Customers May Be Making You Money!
 
Weeding is critical for a successful garden, just as it is for a successful business. Just as critical, but more difficult, is thinning your garden (or in this case, your business).
 
Thinning”, is the practice of looking at our garden plant, or our business, and pulling out those clients that aren’t looking too good and probably will produce little or no fruit.
 
To enlarge on this gardening metaphor, let's first look at something from an article written by Bob Salvas, marketing consultant, SCORE counselor, and host of Momentum Live and many local networking events.
 
Profitable customers tend to make up only around 20% of a company’s customers.
 
In a Washington Post article Bob referenced, the authors concluded that “…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%.” Notice the Pareto Principle at play here? The 80/20 rule?
 
One of the take-aways here is that a loyal customer isn’t necessarily a profitable one. You need to ask yourself, “are they a loyal customer because they are purchasing my products or services on the cheap”? Would they still be a loyal customer if I raised their costs to bring them in line with the other top 20% of my clients?
 
These are hard questions that should not be asked in a purely dollars and cents vacuum. For example, maybe they aren’t pulling their weight when it comes to my profit margin, but are they contributing to my success by referring others to me?
 
Price driven loyalty is always the lowest form of loyaty.
 
Another article published in Retail Wire, affirms that most loyal customers are not profitable. They also conclude that “…price-driven loyalty is always the lowest form of loyalty. It means that we aren’t offering differentiated value to our customers”. Essentially, they are loyal only because of price, not because we stand out from the crowd. Once they get a better price, they’ll be gone.
 
In a Harvard Business Review article “When customer loyalty is a bad thing”, the authors provide three questions that we should ask when reviewing our customer base:
1.   Which loyal customers are good for business?
2.   How do we hang onto them? And
3.   How do we get more customers like them?
 
They conclude that profitable loyal customers are almost always driven by differentiating aspects of our products and services, which means, as noted earlier, we stand out from the crowd, not because of price, but because we offer something that our competition doesn’t.
 
That extra something can be boiled down to “meeting and exceeding customer expectations”. By doing this, you create the most valuable commodity your company can have - trust. In a study by Rare Consulting, they conclude that 83% of customers said their brand loyalty stemmed from the trust they had in the company.
 
Just a 5% increase in customer retention increases business profits by 25% to 95%.
 
Trust, in turn, increases customer retention. According to an article by the Harvard Business School, just a 5% increase in customer retention increases business profits by 25% to 95%. Part of this is due, no doubt, to the fact that it’s much more expensive to get new customers. It’s estimated that new customers cost five times more to convert then existing customers. We all talk about new clients, but we have to remind ourselves that getting them can be pretty expensive.
 
So where does this leave us? Obviously, we have to make some hard decisions. Thinning the garden always seems a bit counterproductive, but in the end, you’ll have a bigger yield.
 
In a commencement address at the University of Pennsylvania, Eric Schmidt, long-time chairman and CEO of Google said, “In a networked world, trust is the most important currency”.