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Why companies focus on loyalty

Why companies focus on loyalty

By Josh Tretakoff on October 07, 2014

There's an old adage in business: 80% of your business comes from 20% of your customers. This is frequently abbreviated as the "80/20" rule, but it's an adage that has proven time and again, in most every business. What it boils down to is, in any business, your best customers tend to be the most important to your business, and, as a result, companies want to spend a great deal of effort to keep those customers doing the same level of business and not go elsewhere. In other words, they want to reward their best customers for their loyalty.

Loyalty is an interesting concept to businesses. Some companies build their entire businesses around it. The obvious ones are in the travel industry, with frequent traveler programs. Why is that? Well, in the case of airlines, rental cars, and hotels, the experience is highly regulated and it's hard to differentiate. As a result, giving you an explicit reward for your patronage is an easy way to get you to choose them again and again.

But it's not always so explicit. Often I'm asked by companies if they need a "points program." I always ask, "Why?" Look at companies like Zappos, the online shoe retailer, for instance. While Zappos is a private company (and did you know it was a subsidiary of Amazon?), so they don’t have to disclose anything, they are proud to tell everyone that 75% of their purchases come from repeat customers. Yet Zappos does not have a points program, so they clearly don’t need one.

Loyalty is the summary of all of the above. It’s the reason, whatever reason the customer may have, to choose your company over and over for their needs. There is no "one size fits all" loyalty solution: while a points program would not necessarily hurt the loyalty of a customer base, if it doesn’t resonate, then it is a costly waste of resources. In the case of Zappos, they inspire their customers with an extremely liberal return policy, as well as "surprise and delight" gifts and policy changes. But for a competitive airline, which is viewed as more of a utility, they need to be able to establish an explicit value proposition to the potential customer, so a points program works well.

The fascinating contradiction is when you look at companies' marketing budgets, however. The vast majority of marketing is also split 80/20…but not in the way you think. Usually, 80% of the budget is spent on acquisition, while only 20% is spent on retention. Think of those glossy airline credit card offers, promising 50,000 miles, or hat first time promotion for free 2-day shipping…those cost businesses millions, but it's considered worth it if just a small percentage of those new customers become great customers.  

The best businesses you do business with are ones where it's not just a financial transaction, it's an emotional bond. When businesses invest in their loyal customers with happy surprises, unexpected gifts, and above and beyond service, that's a customer not only for life, but one who will attract many more of the same. Now that's an investment worth making.

 

Joshua Tretakoff is the Director of Loyalty for JustAnswer. As a cofounder of Loyalty Lab, he's spent over 15 years in the loyalty business, and created loyalty programs for companies as diverse as Sears, Virgin America, 1-800-Flowers, and more. He's focused on JustAnswer members and ensuring their experiences continue to be beyond expectations.