“Hi Mr. Fox. It’s Jean at AAA Pool Company. I’m calling you back regarding the quote we gave you to fix your pool pump.”
The pump on our pool needed to be replaced, and I was, to say the least, a little surprised at the $2,000 estimate AAA Pool (not its real name) had just given us. So, I had some questions.
“$2,000 seems really high for this type of job. Why do we need to spend $1,100 on the pump?”
“You see, Mr. Fox, by law in California, we can only replace your pool pump with a Pentair Pool Pump.”
Alarm bells started going off in my head. This just didn’t smell right at all to me.
“Let me call you back. I’ll let you know what we will decide to do.”
I got off the phone with Jean, and I did some quick research into pool pumps. I found a couple websites that explained how to determine the size of the pool pump you needed.
You lose your customers when you prioritize short term profits.
The pump AAA Pool Company recommended was a top-of-the-line, 3 Horsepower Pool Pump. I used the simple formula the website suggested and I knew we only needed a ½ Horsepower Pool Pump.
Worse yet, using a 3 Horsepower Pool Pump with the size filter we had would burn out the pump. Not only was AAA Pool overcharging us by $1,000, AAA Pool was giving us bad advice.
AAA Pool lost us as a customer in a heartbeat.
One bad decision. That’s all it took to undo the trust that had been built up over years of service. AAA Pool went for the short-term profit instead of playing the long game, and they lost us as a customer.
Rule Number 1 in building customer loyalty: Always, always, always, put your customers’ interests before your interests!
Acquiring customers takes time, effort, and money. Treat customers well and they remain your customers for a long time. The opposite side of that is also true: you can lose your customers in an instant.
All it takes is one screw up! It’s very difficult to gain loyalty back once you’ve lost it.
It’s not just service businesses that need to think about customer loyalty.
Years ago, I was hired to be General Manager of one of the three divisions of a semiconductor company. The division I took over was focused on the communications IC market.
The year was right after the communications bubble burst. The division had achieved $100M in revenue during the peak of the bubble.
One of the sales tactics the division employed during the bubble was overcharging (by about 3X) for their product. They got away with it because the company’s only competitor couldn’t keep up with demand.
It was like selling gasoline in a hurricane, I thought. They were gouging their customers.
The result was very predictable
What do you think happened to their business after the bubble burst? The division went from $100M to less than $10M in revenue. Worse yet, their market share dropped for 35% to less than 10%.
Customers were rightfully pissed off. They voted with their pocketbooks, and these customers choose to do business elsewhere. It took a long time to rebuild customer loyalty because customers have long memories when they feel they’ve been taken advantage of.
Rule Number 2 in building customer loyalty: Forsake your short-term profits.
My Mom went into the real estate business when my brother and I were in middle school. Real estate is a tough business. Successful agents grind, working seven days a week.
My Mom was no exception. Slowly but surely, through grit and determination, she became one of the most successful real estate agents in the San Fernando Valley area of Los Angeles.
My Mom built her real estate business using this simple formula:
- Start off selling small condominiums and townhouses, and…
- Put your clients’ needs ahead of your short-term profits, which leads to…
- Happy, satisfied customers that…
- Use you again when they graduate to larger homes, and…
- These clients refer you to their friends and…
- With a little luck you have a thriving business with satisfied customers.
If only it was that easy!
And, in a way, it is that easy. Don’t ever succumb to the desire for short-term profits. My Mom instinctively understood this whereas the CEO I worked with years ago didn’t.
Here’s what happened to the stock price of the CEO’s company:
From a peak stock price of $74/share down to $13/share. The company never regained its past glory. Eventually, the CEO was forced to sell the company.
The CEO put his customers’ needs second and he paid the price.
The economics work for you too when you think long term instead of short term.
The White House Office of Consumer Affairs estimates loyal customers are worth up to ten times their initial purchase.
Let’s say a customer’s first purchase with you costs $1,000, and it cost you $800 in expenses (advertising, etc.) to acquire the customer. Let’s say you are selling software, so your profit margins are close to 100%, so your net profit is $200.
The customer makes nine more purchases of $1,000 each with you during the lifetime of your company, so the total revenue you get from the customer is $10,000. The lifetime profit you’ve made is $9,200 because you’ve already acquired the customer.
Compare that to having to acquire each and every customer again and again because your service is bad and customers only buy once from you. You do the same $10,000 of business, but with ten customers instead of one.
This time your net profit is $2,000 ($200 x 10) instead of $9,200 because your customer acquisition costs are 10X higher. It really pays to put customers first, doesn’t it?
The Exponential Effect of Customer Loyalty
When I started my company, the average customer’s first purchase was all of $10. $10! Our goal was at least $10,000 per customer, so we were way off our goals.
Our board of directors was nervous. One board member said, “$10 purchases aren’t going to work. We need larger customers!”
I reminded the board (and myself) of my Mom’s formula of success: “The orders will get bigger,” I said.
But I was scared. What if the customers never got any bigger?
We stayed true to our plan, and continued to forsake short-term profits for long-term success.
I waited and prayed I was right.
Then, finally, the customers started getting bigger and bigger. The $10 purchases led to $100 purchases, and the $100 purchases led to $1,000 purchases, and the $1,000 purchases led to $10,000 purchases, and the $10,000 purchases led to $100,000 purchases.
My Mom’s magic formula worked! It always does!