To say that keeping existing customers is equally as important as finding new ones might be considered a bit of a cliche.  Cliche or not, building customer loyalty by understanding customer lifetime value is becoming one of the few ways to beat the competition.  The cynical might wonder just what businesses thought they were there for if not to find and keep customers - but better late than never.  In the tough new world of marketing, companies have to love their customers and do what they can to make the bond to the brand as unbreakable for as long as possible. 

They have been spurred on by an onslaught of statistics that underline just how crucial retaining customers can be: 

Reducing customer defections can boost profits by 25-85 per cent (Harvard Business School) 

The return on investment to marketing for existing customers can be up to seven times more than to prospective customers (Ogilvy & Mather Direct). 

The price of acquiring new customers can be five times greater than the cost of keeping current ones (US Office of Consumer Affairs). 

The problem companies face is that we customers are not only more knowledgeable and demanding, but are damned fickle.  We know bad or even merely mediocre service when we see it.  If we find something better we will not hesitate to go for a quickie divorce.  And we will probably tell our family and friends. 

That explains one of the big growth areas in marketing services - customer loyalty programmes. 

Too many of them, however, are a waste of money.  Why?  Because either they are used as short-term promotions in the hope of boosting sales, or companies plunge into them because the competition has.  What loyalty programmes should be are a long-term strategic investment designed to have a measurable impact on the bottom line over time.  And that time should be a lifetime of a valuable customer. 

The problems begin with definition.  You can only judge something as a success if you have built-in measurement tools from the start.  That means the aims and objectives are clear.  This is clearly not the case for many companies, as research by PCL Direct Marketing has discovered.  PLC, which was involved in setting up the successful Shell SMART card loyalty programme, interviewed over 300 senior marketing managers from blue-chip companies on how they defined and viewed customer loyalty. 

The results speak for themselves.  About a third defined customer loyalty as repeat purchasing, eight per cent as customer retention, and the rest offered somewhat vague answers like building relationships, respecting the customer, ensuring the customer does not buy competitive products, and prolonging the relationship between customer and suppliers. 

An even stronger indication of confusion comes from responses about how to measure the success of programmes.  About a fifth said increase in sales / turnover  / profit, 16 per cent said it should be measured through customer surveys and questionnaires, nine per cent through repeat business, with others including a lack of customer complaints and comparison of customers in the scheme with those who were not. 

MEASURABLE OBJECTIVES 

The place to start is with well-defined objectives.  What, exactly, do you want a customer loyalty programme for?  How will you evaluate results?  And remember, warns Marcus Evans, managing director of Ogilvy & Mather's Loyalty Centre, that a customer loyalty programme can never be a panacea for faulty service, incorrect pricing, or a declining brand.  What loyalty programmes at their best should do is begin to change behaviour by understanding and meeting individual customer needs and encouraging them to stay loyal to the brand through an imaginative, flexible programme.  That might sound like a tall order, particularly if the customer base runs to the millions, but it is becoming more feasible with modern technological tools which enable collection, verification and manipulation of enormous amounts of information. 

Loyalty is not just about giving out loyalty cards, sending magazines, or giving points for purchases.  It is about seducing your customers - not bribing them - by setting definable and measurable objectives which should have as an ultimate goal increasing profits.  That many companies have yet to get to grips with this is indicated by the findings of the latest American Customer Satisfaction Index, published in Fortune, that customers were less satisfied overall with corporate America in 1995 than 1994.  The ACSI results suggest that not only do too many companies still view customer service as a cost rather than as an investment but they have been insufficiently aware of customers' rising expectations.  Even more tellingly, they have not yet figured out how to define customer satisfaction in a way that links it to financial results. 

But it is this link which has to be at the heart of business.  Everything a company does, even something seemingly as "soft" as loyalty, has to be justified financially.  And that means knowing the answers to three basic questions.  What is the value of your customer base?  How much is a new customer worth?  And how much should you pay to keep an old one?