Loyalty marketing aims to manage those profitable relationships by first defining profitable behaviour and consequently designing a range of marketing initiatives to maintain and influence profitable behaviour, thereby delivering incremental yield and maximising customer lifetime value.

The fundamental assumption in loyalty marketing is based on the principle that keeping existing customers is considerably less expensive than acquiring new ones. Reichheld and Sasser claimed that an improvement in customer retention of just 5% can cause an increase in profitability between 25% and 85% (in terms of net present value) depending upon the industry. Therefore increased 'customer loyalty' has a direct relationship with increased customer profitability.

The increased profitability associated with loyalty marketing via customer retention or customer loyalty occurs because: acquisition costs only occur at the beginning of a relationship, so the longer the relationship, the lower the amortised cost; account maintenance costs decline as a percentage of total costs.

What are the characteristics of long-term customers? Long-term customers:

• are less inclined to switch brand
• tend to be less price sensitive
• may introduce new customers via verbal referral
• more likely to purchase additional products
• tend to be satisfied with the relationship
• are less expensive to service
• are familiar with your products and processes
• require less product education
• are consistent in their buying behaviour

Your long-term customers are the basis of your loyalty initiatives. The more customers you can get to stay with you the easier it is for your employees to interact with them and to service their needs. In turn, happy employees feed back into better customer satisfaction in a virtuous circle.

However, not all customers are profitable and striving to maintain the loyalty of unprofitable customers is not viable. Therefore, it is also important that marketing professionals assess the profitability of each customer or consumer segment by comparing customers' 'relationship costs' with 'relationship revenue' and terminate those relationships that are not profitable.

To many, the principle of loyalty marketing may sound obvious (even, perhaps, too obvious to discuss), however very few companies direct a significant part of their marketing budget and efforts towards loyalty marketing. But why do so few companies actually practise loyalty marketing effectively, when it makes sound commercial sense and is proven best practice?

Loyalty marketing is a relatively new name for a tried and tested business practice, which has been around as long as people have been trading. In the last century, it was practised by all the savvy merchants - they knew they had to look after their best customers properly, as these were the ones that generated the most profits; the staff came to know all the customers personally, knew what they bought regularly, could anticipate their needs, and could reward those who generated the most profit. But today, in a fast moving, higher-volume, competitive world, to practise loyalty marketing, you need high quality customer data in order to identify your best customers, and then you need to market to them in a relevant, motivating and personalised way.

For most companies, in order to meet or exceed commercial objectives, increasing the loyalty of customers and other stakeholders through loyalty marketing initiatives is a strategic business imperative.

In summary, loyalty marketing's raison d'être is to maximise customer lifetime value through influencing profitable behaviour and actively fostering customer loyalty.