loyalty effect

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A technique that measures the impact of loyal customers on profitability. The reason for increased profitability is that the costs of serving existing loyal customers are generally lower than the cost of marketing to new customers. The work of the American management consultant Frederich Reichheld, The Loyalty Effect (1996), quantified the cost differential in certain industries (automotive, life insurance, and credit cards) as 5 times higher to win new customers than the cost to serve existing, loyal customers. Reichheld also identified several other contributions from loyal customers: the accumulation of total lifetime profits from a loyal customer; lower marketing costs, given the loyal customers' familiarity with existing products and services; higher revenues, as loyal customers tend to spend more over a longer period of time and they tend to recommend to others the products and services that they trust, and diminishing sensitivity to price increases.

Subjects: Marketing.

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