If you don’t think loyalty pays, think again.
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According to a new analysis by SumAll, the New York-based analytics company, 25% to 40% of the total revenues of the most stable businesses in the SumAll network come from repeat business. What’s more, these customers help businesses weather tough economic times. In a recent 12 month period SumAll found businesses with a 40% level of repeat customers generated 47% more revenue than similar businesses that only had 10% of their customers returning.
“Repeat customers are by far your best,” says Dane Atkinson, Chief Executive of SumAll. “Across our 30,000 sellers, returning customers spend 2.6 times that of one time buyers.” Atkinson says repeat customers tend to spend more on each purchase. The margins are higher on these purchases as well because the business has no added costs associated with acquiring the customer.
While companies can survive without repeat business, thriving and growing will undoubtedly be tough.
“A restaurant in a tourist zone with horrible food can likely get enough new customers to survive but not a platform to expand from,” says Atkinson. “The first drought in tourism is likely to crush them.”
Every size company needs repeat business but for small companies it is essential. Not only do small businesses benefit from the margins offered by repeat customers, but they need the word of mouth advertising loyal customers provide.
“Those customers are the backbone, the ones that tell their friends and come to buy when no one else is,” says Atkinson. “It’s how you go from small to large. Every brand that has crossed that chasm has been supported by a loyalist following.”
But what level of repeat customers does a small business need to have in order to endure?
According to SumAll, companies that hit 25% or more repeat customers in three years are likely to move on to the next level. Companies that aren’t there in three years need to set a goal to increase their repeat customers by 5% a year until they’ve met or exceeded the 25% threshold, says Atkinson.
So how can small businesses turn one-time customers into loyal ones?
Atkinson says the first step is to encourage a high initial purchase. SumAll’s analysis found there is a direct relationship between the dollar amount for the customer’s first purchase and the chances of them coming back. People spending the most on a first transaction were nearly twice as likely to return than those spending the least, says Atkinson.
“Promotions geared for new customers are a great way to turn one-time buyers into loyal customers,” says Atkinson.
Once you’ve got the customer in the door, the next step is to figure out some sort of incentive to keep them coming back. According to SumAll’s analysis, customers who buy once have a 27% chance of making a second purchase while someone who has purchased a fourth time has a 59% chance of coming back.
“Think about what benefits can create higher returning behavior, whether it’s buy five cups of coffee get the sixth free or join Amazon prime and get a year of free shipping,” says Atkinson.
When it comes to marketing, many small businesses pour all of their money in attracting that new customer and give little thought to the existing ones. That, says Atkinson, is a big mistake. He says 25% of the marketing budget should be devoted to returning customers.
That means small businesses should give their loyal customers more personalized attention, whether it’s phone calls to make sure they were happy with their most recent product or service, offering them VIP designation at exclusive events or free shipping and purchase incentives.
“You will make your best customers feel special and give them additional reasons to buy,” says Atkinson.