4 min read

How Customer Loyalty Drives Small Business Profits

Been thinking about improving your customer experience, attracting more return customers and increasing profits? This post is for you.
How Customer Loyalty Drives Small Business Profits

When was the last time you gave serious thought to customer loyalty?

Better yet, when was the last time you actively worked on ways to improve customer loyalty? It’s an important question because improving customer loyalty and the frequency of visits is one of the best ways a small business owner can grow.

In this post, I want to share some important statistics, suggest a few business improvement ideas and leave you with some more questions for you to ponder on customer loyalty.

Why customer loyalty matters

Provides upside, protects downside

According to a study released by American Express:

  • Happy customers will share their positive experiences and give referrals to 11 people.
  • Angry customers will share their negative experience and give anti-referrals to about 15 people.

This is an enlightening pair of statistics. Most people think of customer loyalty in terms of capturing the upside. But it turns out protecting the downside might be more valuable to a small business.

On average, four more people are likely to share bad experiences than those who will share good experiences. To me, this stresses the importance of customer loyalty as positive experiences will encourage customers to make referrals to new customers, but bad experiences might encourage customers to stop other people from visiting your business.

By focusing time and investment on customer loyalty a small business can both tap into the upside from customer referrals and reduce the downside from detractors giving bad reviews.

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Repeat customers are more profitable

Bain & Company analysis reveals that:

"A 5% increase in customer retention correlates with at least a 25% increase in profit."

There are four reasons why:

  • Return customers tend to buy more from a company over time.
  • As they do, the operating costs to serve them decline.
  • Return customers refer others to your company.
  • They are more likely to pay a premium to continue to do business with you rather than switch to a competitor with whom they are neither familiar nor comfortable.

That’s an outsized impact on profit (even better than revenue). According to the study, each 1% improvement in customer retention drives a 5% impact on profit. This finding should give small business owners and managers the confidence that, done right, customer loyalty can be a good investment.

How to improve customer loyalty

Customer loyalty is gained gradually over time

Customers gradually gain loyalty for a business after repeated experiences with excellent products, service, reviews or advice.

A small business can’t hope to focus on customer loyalty for one day, and then reap the rewards for years. No, it’s a continual pursuit of customer satisfaction that leads to the benefits of customer loyalty.

The way to do this is to build it into your business.

You can improve customer loyalty by designing your products and services to provide a memorable experience, and delighting customers during all their interactions with your business.

Go through your products and services, note every customer touch point during their interactions with your business and then brainstorm ways that you can make each interaction incrementally more delightful for your customer.

Customer loyalty is driven by customer service

Here are some statistics:

  • Over 90% of customers are likely to make repeat purchases from companies with excellent customer service.
  • 69% of customers would spend more on a company with better customer service.
  • 68% of customers believe a great customer service interaction is fueled by a pleasant experience, 62% say a knowledgeable experience and only 42% say a quick experience.

This is where you want to decide where to focus your customer service efforts (friendliness, knowledge or speed) and make sure to train your employees to consistently deliver on this promise.

Go to online reviews of your business and similar businesses and try to pull out consistent themes in customer feedback. What do customers constantly pull out as positives from the service experienced, and what do they pull out as negative experiences? This will provide a great customer-backed cue as to where your small business could focus customer service efforts.

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Lock it in with a well-designed loyalty program

Many small businesses have the opportunity to introduce a formal loyalty program to reward return customers. A very simple application is for one free coffee for every 10 purchased. Customers like them too:

  • 52% of customers will join a loyalty program with a preferred company.

But also…

  • 55% of consumers enrolled in customer loyalty programs use them infrequently.

To make the time and investment worthwhile, look for ways to increase engagement with your loyalty program.

Three questions for you to ponder

We started off by asking you how much thought you’d given to customer loyalty recently. Let’s finish by considering three questions might lead to some action on customer loyalty, and get you moving on this important area:

  • How many orders are from repeat customers?
  • What percentage of your revenue is from repeat customers?
  • What are you doing to improve customer loyalty?

Before you go...

We all know that small business is about doing the little things right.

The little optimisations, the high-impact tweaks and the 1% gains you can make to your business to make it a little better, a little more profitable and even a little bit more pleasant to run.

I have interviewed 500+ business owners, surveyed thousands more, and I am always probing for their best tips, tricks and hacks to improve their business. There are three that stand out above the rest and I want to share them with you.

Join my email list for free and I’ll send them to you right now.