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IT PAYS TO RATE RETENTION REACHING LOYALISTS IS EXPENSIVE, BUT CHEAPER THAN CONQUEST EFFORT

By Published on .

Earning customer loyalty doesn't just make carmakers feel good, it pads profits.

For every 5% improvement in customer loyalty, profits grow 10% to 15%, according to Fred Reichheld, a director of auto consultancy Bain & Co.

These profits come from higher revenues and more effective marketing expenditures, he says.

In new-car transactions, the customer retention rate is much less than 50% for most manufacturers. The retention rate for post-warranty service work is even worse.

And losing customers isn't just bad news on the income side. It's also bad news on the expense side. It can take five to 10 times as many dollars to "conquer" a new customer as it takes to keep an existing customer, according to industry experts.

Marketers are aware of these numbers and are doing something about it.

For instance, Volvo Cars of North America has above-average customer loyalty, yet it retains only about 41% of its customers each year. Like other companies, Volvo spends a lot of money to identify "ideal prospects" with the right demographics.

Even so, only 0.3% of the prospects contacted by mail actually buy or lease a Volvo, says Norm Suslock, president of Volvo's direct-mail agency, Direct Marketing Associates in Stamford, Conn.

Among existing owners contacted by mail, however, the sales rate is as high as 3%, he says: "In other words, you've sold 10 times more on the same dollar."

To help strengthen loyalty, Volvo is offering free scheduled maintenance on a new car to owners of 1982 through 1986 models if they buy by the end of March.

Surveys show owners of those models are worried about high maintenance costs, says Bob Austin, director of marketing communications.

Subaru of America has also offered rebates and other benefits exclusive to owners, says Tim Mahoney, manager-niche marketing.

The marketer offered a $25 retail-store gift certificate to get people to test drive the Legacy when it was introduced in 1990. A direct-mail piece was sent to three consumer groups: owners of Subarus, owners of a competing Nissan model and consumers with similar demographics to Subaru owners, Mr. Mahoney says.

Counting all Subaru models, the Subaru owners bought 800 cars, even though they were the smallest group, and the other two groups bought about 100 each, he says.

However, the auto industry is a late convert to the benefits of customer loyalty, says Mr. Reichheld. "When it comes to being really serious about improving loyalty, on a scale of one to 10, I'd put the auto industry at about a 3."

But the sole exception, he says, is Toyota Motor Sales USA's Lexus division.

Lexus had the benefit of starting with a "blank sheet of paper," and customer retention has been a high priority since the planning of the brand, says Don Esmond, manager of corporate sales and operations.

The company has maintained loyalty through constant communication between the customer and both the dealer and the corporate office.

Mr. Esmond says about 65% of the customers who got out of a Lexus last year bought or leased another one. On the leasing side, it was around 88%.

As Lexus has matured, this repeat business has helped it save money. Lexus bought $60.4 million worth of advertising in the first nine months of 1993, compared to $87.2 million in the same period in 1992, according to Competitive Media Reporting.

"I view investments in retention as just that-investments that will provide a return. Rather than rebates, or some of the other programs that are out there, I think there's a more effective place to put the same amount of money," Mr. Esmond says.

Mr. Reichheld says Saturn Corp. also has "made a lot of the right decisions," but adds that it's too early to gauge Saturn's retention rate.

Mr. Reichheld says the industry should dedicate itself to "zero defections" on the customer service side, in the same way that the manufacturing side has pursued "zero defects." In other words, he says, the entire organization has to be set up for loyalty, from factory to showroom floor to service department.

That includes the organization's own employees as well as the customers.

"If you don't pay people well, you're not going to have the best people," he says. "Why should the customer come back if the employees don't come back?"

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