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All companies want loyal customers. But are loyal customers really the most profitable customers? If a customer is loyal because the company offers particular deals, the company may not be earning much profit from that customer.

As a general rule, 20 percent of a company’s customers are profitable, 60 percent are breakeven customers, and 20 percent are unprofitable. Thus, companies must measure not just customer loyalty but also customer profitability. With such a combined metric, the company can determine whether each customer is worth expending effort to make him or her loyal.

A combined analysis also reveals whether some profitable customers might not be loyal, and vice versa. With such information, companies might change their customer strategies. For example, they still could offer good deals to loyal customers, but they also should recognize which deals attracts only loyal, unprofitable customers and which deals bring in and reward loyal, profitable customers.

Discussion Questions:

  1. What is the customer loyalty misconception many companies suffer?

2. What can companies do to address this misconception?

 

Tim Keiningham, Lerzan Aksoy, Alexander Buoye, and Luke Williams, “Why a Loyal Customer Isn’t Always a Profitable One,” The Wall Street Journal, June 22, 2009.

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