Executive Summary
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Given that one of the three key determinants of customer loyalty is the total cost of owning a company’s product or using their service, financial techniques can play a significant role in building customer loyalty, and ultimately the company’s profitability.
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Some of the financial techniques that can be used to build customer loyalty include:
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discounting;
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frequent buyer programs;
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loyalty programs;
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special terms for prepurchasing;
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enhanced credit terms;
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bundling of goods or services;
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discounts on purchasing related goods or services.
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Since all markets are not the same, not all financial techniques have the same impact across markets. Whether the market consists of consumer or business buyers is the biggest determinant of how effective a financial technique is in building customer loyalty.
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Implementing a technique to build loyalty with customers may not have a short-term payoff, and in certain markets it can actually create problems that cost the company more than the increased profitability attributable to increasing the period of time the customer is retained.
Introduction
Every organization knows that in order for it to survive, let alone grow, it has to acquire and then retain profitable customers. And it is loyal customers that generate increasing profits for each additional year they are retained.
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Acquiring new customers can cost five times more than retaining current customers.1
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A 2% increase in customer retention has the same effect on profits as cutting costs by 10%.2
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A 5% reduction in customer defection can increase profits by 25–85%.3
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The customer profitability rate over the life of a retained customer tends to increase annually by up to 20%.4
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Extensive and continuing research into customer loyalty has concluded that it is driven by the customer’s ongoing perception of value, which is a combination of:
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what the customer receives;
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how the product or service is sold, delivered, and supported;
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how much the product or service costs—that is, the price or total cost of ownership.
Finance professionals can deploy a wide range of techniques that can impact the customer’s total cost of owning their company’s product or using their company’s service, which in turn impacts customer loyalty and ultimately the organization’s profitability. Not only do financial managers need to be aware of the many techniques under their control, but they also need to be aware of some of the problems, where relevant, that may be encountered in implementing a specific technique.
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