There are four ways long term customer relationships increase profitability; Repeat sales, Referrals, Recognition, and Recruitment.
It seems so obvious: Satisfied customers mean a more profitable store. Every executive says the "Customer is always right" or "We want you to be 100% satisfied." Why then, are so many customers not satisfied and why are many stores only marginally profitable? One cynical answer is that slogans are slogans but no one really means them. Perhaps that is true for a few executives but there may be a different explanation for the others. The correlation between excellent customer relationships and excellent profit performance is not completely understood.
There are four ways long term customer relationships increase profitability; Repeat sales, Referrals, Recognition, and Recruitment. Simple programs can increase repeat business or improve recognition of target markets. However, the total benefit from a complete customer relationship program is greater than the sum of the gains garnered from working on each goal independently. Once each benefit, and the interactions between them are defined and understood, a plan that completely satisfies customers and dramatically improves return on investment can be devised and deployed.
Repeat sales help in two ways. One store spends roughly $35 on advertising to get a new shopper in the door. With a close rate of about 40%, the advertising cost per sale works out to $87.50. If that customer is completely satisfied, it should take no more than a postcard or a phone call to generate a repeat sale. Every additional repeat sale yields almost the full gross margin, not the gross margin less $87.50. Repeat sales yield more profit for the same amount of gross sales based upon the savings in advertising and promotion dollars spent.
There are other benefits to repeat sales. When there is a relationship of trust between the sales staff and the buyer, there is a greater respect for the sales person's advice. Complementary items are more easily sold and there is less pressure to negotiate price with the buyer and more room to maneuver for the sales staff. Remember that the $87.50 is no longer cost to be recaptured. Achieving the trust necessary to form a good relationship makes increasing the average ticket possible and makes maintaining the gross margin easier. A repeat buyer program is a necessary component for any effective customer relations program.
If your customers are coming back to you, then they should be referring customers to you as well. Frederick Reichheld in his book, "The Loyalty Effect", says that a recommendation from someone a shopper knows is twice as effective as an advertising statement. Their credibility is added to your credibility in the eyes of the new buyer. The referral sale has all the same monetary benefits for the store as the repeat sale. New revenue with no incremental advertising and higher gross margins mean significantly more profitability. No customer satisfaction strategy is complete without a referral program.
A complete database of your customers' buying history and preferences permits you to identify key trends and their relationship to your product, service, and media mix. Recognition is the third benefit of building long term customer relationships. Unless you can follow some of the same customers from year to year, you will have a very difficult time determining when tastes are changing or more importantly when they will change. Understanding the demographics of your customer base is helpful in some cases when deciding whether there is a shift from homes to apartments or from first homes to trade ups. But, the specifics of the styles and models that will sell, and the insights into why they sell, do not come from demographics. That degree of market recognition only comes from close customer contact, careful record keeping and analysis.
Finally, your satisfied customers define the market niche in which you are successful. Organizations typically have a marketing strategy that relies on the segment of the market they are serving. Many organizations do not know if the segment they intend to serve is the segment they are serving. The segment of the market represented by long term repeat buyers is a segment of the market that should be one focus of the marketing strategy. Clear identification of this segment allows executives to reap the fourth benefit of building customer relationships, recruiting new customers. The media mix, promotional programs, and sales staff training can all be tailored to maximize effectiveness for a particular market segment. The segment need not be a tiny niche and indeed can be broadly defined, but it must be well defined so that we will generate the most new buyers possible from the given advertising budget.
How then do executives produce these results without having to spend all their time on customer relationships? After all, many other important issues demand attention and critical decisions need to be made. Hiring and training the right people, proper incentive programs, product, service, warranty offerings, and complaint resolution are all part of a successful customer relationship program. However, the key first step in implementing a new customer relationship strategy is the installation of information systems that provide support for customers and sales personnel. None of the programs for repeat business, referrals, market niche recognition or customer recruitment are possible without hardware and software support.
Implementation of new computer systems need not be traumatic or chaotic. Professional software organizations and well designed Windows software make the transition to automated systems much less painful than some executives might believe. Furthermore, the implementation of hardware and software offers by far the best return on investment of any step in the customer relationship building process. Even with an investment in training for sales staff in all four areas, the staff can still only work with one customer, referral, or shopper at a time. But the investment in a customer satisfaction software information system provides all four benefits simultaneously. The data collected to enhance repeat business is the same data that supports a referral campaign and is the same data that identifies your target market. While promotional efforts would clearly be different when approaching each group individually, the information requirements are the same. UpFront is one product that supports all this functionality and is extremely easy to use.
A successful program requires an understanding that the return on investment from a customer relationship building program is higher than many expect because there are four ways to benefit. The investment needed to achieve success in one area, results in progress in all four. The managerial effort and infrastructure investment required to improve in one of the four R's does not appreciably increase when the other three are improved, as long as the information system supports the other three.
David Middlebrook is vice president of AAAA Development, LLC. Questions can be addressed to him care of FURNITURE WORLD MAGAZINE at firstname.lastname@example.org.