Managing Customer Relationships and Building Loyalty

Underlying this profit growth are a number of factors that work to supplier’s advantage to create incremental profits. In the order of magnitude at the end of seven years, these factors are:2
1.Profit derived from increased purchases (or, in a credit card and banking environment, higher account balances). Over time, business customers often grow larger and thus, need to purchase in greater quantities. Individual customers may also purchase more as their families grow, or as they become more affluent. Both types of customers may be willing to consolidate their purchases with a single supplier who provides high quality service, resulting in what we call a high share-of-wallet.
2.Profit from reduced customer service costs. As customers become more experienced, they make fewer demands on the supplier (for instance, they have less need for information and assistance, and make use of self-service options more). They may also make fewer mistakes when involved in operational processes, thus contributing to greater productivity.
3.Profit from referrals to other customers. Positive word-of-mouth recommendations are like free sales and advertising, saving the firm from having to invest much in these areas.
4.Profit from lower price sensitivity that allow a price premium. New customers often benefit from introductory promotional discounts, whereas long-term customers are more likely to pay regular prices, and when they are highly satisfied they tend to be less price sensitive.3 Moreover, customers who trust a supplier may be more willing to pay higher prices at peak periods or for express work.
5.Acquisition costs can be amortized over a longer period. The upfront costs of attracting new buyers can be amortized over many years. These costs can be substantial and can include sales commissions, advertising and promotions costs, administrative costs of setting up an account, and sending out welcome packages and sign-up gifts.