June 2006

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article was first published in the Eastern Daily Press' 'The Business'  on 28 June 2006</I></div> <bR> <div> <B>Loyal customers or fickle monsters?</B></div> <bR> <div> An article on the BBC News website caught my eye this week.  It stated that the banking industry “has been steadily fighting back against a group of people who have been draining it of hundreds of millions of pounds in potential profit”.  `Rate tarts' - people who move their borrowings from one credit card to another in search of a cheap deal - are the culprits, it would seem.</div> <bR> <div> I don't agree.  I think they are merely the creation of the very industry that is now struggling to control them; financial Frankensteins, so to speak. They are just behaving in a way that has been rewarded by their creators; they've been trained to be disloyal, and the banks (and their existing customers) have been paying the price. For a number of years now, credit card issuers have been aggressively enticing people to switch their debt, offering 0% interest on the transferred balances, often for up to a year. They have been very slow to remove the enticements, only starting to levy fees for the deals last year, and even today there are a number of providers who will offer 0% for six months, with no charge. In the meantime, who do you think has been providing the bank's profits?  Their loyal customers, that's who. </div> <bR> <div> In this column two and a half years ago, I wrote about the UK's obsession with short-term deals. I described it as `corporate myopia' - losing sight of a fundamental business principle. There is an acquisition cost of every new customer, and until that cost is fully recovered by the profits the customer generates, the business is losing money.  Thus, the lifetime value of customers is key to long-term business growth. And yet in so many businesses I see in my everyday work the focus seems to be on finding new customers, on offering heavy discounts on initial purchases or other short-term tactics, rather than on what the business can do to create and retain loyal customers.</div> <bR> <div> The BBC article went on to say that “zero percent cards cost the industry about £600m a year.” That's a lot of acquisition cost that has to be covered by profits made elsewhere.  It also said that, due to intense competition, lenders were “only too happy to charge no interest at all on transferred balances, in the hope that the new customers would eventually stay and become more lucrative.” Vain hope, I suspect. If you've attracted the customer by encouraging him to be fickle, you shouldn't be surprised if he deserts you at the end of your deal and finds another more attractive one.   </div> <bR> <div> There is a clear link between profitable business growth and customer loyalty.  We'll explore this in more depth in another article, but for now, you might ask yourself “what do I do in my business to ensure that my customers want to come back and trade with me again and again, and to recommend my business to others?” In other words, are you taking the longer-term view and rewarding loyalty, or are you concentrating so much on the short-term that you, like the credit card issuers, are risking financial monsters of your own making?</div> </td> <td valign="top" width=180 BGCOLOR="#CC3333" TEXT="#080000"> <bR> </td> </tr></table></body>