Definition of customerMarketing Somebody who buys product or service a purchaser of a product or service. A customer is a person or organization that purchases or obtains goods or services from other organizations such as manufacturers, retailers, wholesalers, or service providers. A customer is not necessarily the same person as the consumer, as a product or service can be paid for by one party, the customer, and used by another, the consumer.

Financial Techniques for Building Customer Loyalty   Executive Summary  Given that one of the three key determinants of customer loyalty is the total cost of owning a company’s product or using their service, financial techniques can play a significant role in building customer loyalty, and ultimately the company’s profitability. 

Some of the financial techniques that can be used to build customer loyalty include: •  discounting;

•  frequent buyer programs;

•  loyalty programs; •  special terms for repurchasing;

•  enhanced credit terms;

•  bundling of goods or services;

•  discounts on purchasing related goods or services.

Since all markets are not the same, not all financial techniques have the same impact across markets. Whether the market consists of consumer or business buyers is the biggest determinant of how effective a financial technique is in building customer loyalty. Implementing a technique to build loyalty with customers may not have a short-term payoff, and in certain markets it can actually create problems that cost the company more than the increased profitability attributable to increasing the period of time the customer is retained.

 Every organization knows that in order for it to survive, let alone grow, it has to acquire and then retain profitable customers. And it is loyal customers that generate increasing profits for each additional year they are retained.  Acquiring new customers can cost five times more than retaining current customers.   A 2% increase in customer retention has the same effect on profits as cutting costs by 10%.   A 5% reduction in customer defection can increase profits by 25–85%.   The customer profitability rate over the life of a retained customer tends to increase annually by up to 20%.  

Extensive and continuing research into customer loyalty has concluded that it is driven by the customer’s ongoing perception of value, which is a combination of:• what the customer receives;• how the product or service is sold, delivered, and supported;• how much the product or service costs—that is, the price or total cost of ownership.

Finance professionals can deploy a wide range of techniques that can impact the customer’s total cost of owning their company’s product or using their company’s service, which in turn impacts customer loyalty and ultimately the organization’s profitability. Not only do financial managers need to be aware of the many techniques under their control, but they also need to be aware of some of the problems, where relevant, that may be encountered in implementing a specific technique.

Two Provisos First, a financial manager’s primary goal is to maximize the organization’s profitability by accounting, analyzing, and reporting the financial implications of actions taken or which it is proposed to take.

Second, not all markets and customers are the same, and, accordingly, not all financial techniques will have the same impact on building customer loyalty. The major determinant as to whether or not a specific financial technique will impact customer loyalty is whether the customer is in a consumer market or a business market.

In selling to a consumer market (business to consumer, or B2C), the market attributes include:

•  the value of a transactions is usually small;

•   the number of buyers is large;

•   the selling cycle is short;

•   the product, and even the service, can be mass-produced;

•   the selling effort is focused on the end user.

Selling to a business market (business to business, or B2B) requires taking into account attributes that include:

•  the value of transactions is usually larger than for B2C;

•  there are fewer buyers than in B2C;

•  the selling cycle can be long, complex, and involve an ongoing relationship between the seller and whoever is in charge of purchasing decisions;

•  the product or service often needs to be customized;

•  the selling effort is often directed toward a decision-maker who is not the end user.

The above attributes can render a technique for building customer loyalty in a B2C market inappropriate for a B2B market, and conversely.

A Range of Financial Techniques for Building Customer Loyalty As discussed above, total cost of ownership is one of three drivers of the customer’s perceived value of a good or service, with perceived value determining how loyal the customer will be to the seller. Accordingly, any financial technique that can positively impact the customer’s perceived total cost of ownership will build customer loyalty. Of the multitude of financial techniques that are in use, the following are the more prevalent.

A Discounted Price Over a Contracted Time Period The seller offers a lower price for a good or service in return for the buyer committing to purchase the good or service for an extended period of time, usually two to three years, thereby locking in the customer’s business over that period.

Potential problem:

The less unique the product or service is compared to those offered by competitors, the more likely it is that the buyer will use the proposed lower price to negotiate an even lower price under similar terms with one or more competitive suppliers, and then to negotiate a still lower price with the supplier that originally proposed the discounted price. Accordingly, the less unique or customized the good or service is the less viable this financial strategy is for building customer loyalty.

A Discounted Price for a Committed Volume Purchase with Variance

 The seller offers a lower price for a good or service in return for the buyer committing to purchase a certain volume over a period of time. The seller and buyer further agree that if the buyer purchases a certain percentage less than the agreed amount by the end of the period (usually 95% or less), the buyer will pay a premium at the end of the period for the smaller amount purchased, with the premium equaling the difference between the contracted discounted price and the higher price associated with the lower volume times the number of units purchased.

Potential problem:

Like the problem arising with a discounted price over a period of time, the buyer may use the proposed lower price and terms to negotiate a better price and terms with a competitive supplier. Accordingly, this financial technique is more viable with unique or customized goods or services, and is therefore more appropriate for a B2B market.

Frequent Buyer Program

The seller offers the buyer a rebate or free goods or services subsequent to the buyer purchasing a certain dollar or unit volume. Coffee house chains provide a Coffee Club card that is punched every time a cup of coffee is purchased, with the card holder receiving a free cup of coffee after ten purchases.

Potential problem:

Competitors may decide to offer their own frequent buyer programs, and may even increase the value of the discounting, rendering this an ineffective technique for persuading customers to stay with the supplier and not utilize the competition.

Loyalty Program The seller offers preferential treatment or certain services free to buyers who enroll in a loyalty program. National Car Rental’s Emerald Club allows its members to bypass the rental counter and even to select any rental vehicle that is available in their rental class on the lot. Avis’ Preferred allows its members to bypass the rental counter and go straight to the rental cars. Loyalty programs such as American Airlines’ Advantage program offer increasing levels of benefits for members who increase their air miles over a given time period, with Platinum members given preferential seating and boarding over Gold members.

Potential problem:

The added cost of the preferential treatment or benefits may not be offset by the profitability that is expected to be generated by repeat usage by a loyal customer if competitive suppliers offer comparable preferential treatment and benefits, especially if enrollment in a loyalty program is at no cost or low cost. In such a situation the buyer will enroll in multiple competitive loyalty programs and purchase the lowest-priced goods or services.

Repurchase/Buy Forward The seller offers a discounted price to a buyer who pays in advance for an amount of goods or services to be delivered at some future date or over a certain time period, with the discount rate being greater than the interest rate paid on money placed in a low-risk investment. The benefit of this technique to the seller is that it locks in the buyer’s business over a certain period. The benefit to the buyer is that it eliminates any price increases during the contracted period.

Potential problem:

The buyer may try to secure comparable terms with a competitive supplier and then use those terms to negotiate better terms with the original supplier, or the buyer may give the business to the supplier offering the best terms.

Enhanced Buyer Credit Terms The seller offers to finance the buyer’s purchases at an interest rate and terms equal to or better than the buyer would receive from a third-party commercial source of credit. 

Potential problem:

The buyer may try to secure comparable terms with a competitive supplier. Furthermore, the seller needs to ensure that the buyer is creditworthy.

Bundling Goods or Services The seller includes ancillary goods or services at no cost to the buyer when a primary or major good or service is purchased. Personal computer manufacturers such as Dell and HP bundle printers, monitors, and even 24-hour help services with the price of the computer. Express oil change services such as Jiffy Lube include topping off all fluids and checking tire pressure in the price of an oil change. 

Potential problem:

The seller needs to have good cost accounting of the services or goods bundled in with the primary good or service to ensure that profit margins are not needlessly eroded by including certain goods or services in the bundled package.

Discounts on Related Goods

 The seller offers a discount on additional units of an item or other items it sells and which are purchased at the same time as the first unit is purchased. This technique for creating customer loyalty is often found in grocery stores where an item is advertised at some percentage off the price of the second unit purchased. 

Potential problem:

Competitors may implement the same pricing strategy and thereby remove any incentive for the buyer to be loyal to the seller that initially implements the strategy.

Trade-Ins

 The seller offers to buy back its durable goods at prices better than the buyer can secure on the open market if he or she replaces the goods with another version of the seller’s durable goods. This financial technique for building customer loyalty has been deployed by sellers ranging from automobile dealers to clothing retailers.

Money-Back Guarantees or Penalty Payments The seller commits to buying back the good or refunding fees for a service delivered if the good or service doesn’t meet the performance standards established at the time of the sale. During its formative years Domino’s Pizza grew in large part through loyal customers retained by its promise “pizza delivered to your house in 30 minutes or it’s on us.” 

Benefit Sharing The supplier offers the buyer a good or service at a highly discounted price under the condition that the buyer share any cost savings or revenue generated from using the good or service. A select number of companies that provide sales training sell their training programs at deep discounts to buyers who agree to share a portion of the increased revenue attributable to their sales people going through the training.