Friday, October 9, 2009

Gaining Customer Loyalty

Is Free Worth the Trouble…. Is it a profitable method to gain customer loyalty?

Smart business owners know that it costs more to gain a customer than to retain one. Hence, customer loyalty incentives are an important marketing strategy. How do you attract and gain customers? In a recent article in The New York Times by Damon Darlin, “Using ‘Free’ To Turn A Profit”, the author discussed how some company’s use a free approach to gain customers. This is often the case with technology-based businesses providing free web applications. The strategy: gain customers with the tactic to eventually upsell the need for more advanced products and services.

The article cited EverNote, a start-up company in Mountain View, CA that captures data for customers such as meeting notes, text memos, photos and scans that are then logged into one place. The company provides the free service for the basic services with a business goal of creating customer dependency and loyalty. They know that the longer the customers use the service, the greater likelihood that the free customer will result in a long term paying client.

Approximately 25% of this company’s client base becomes paying customers in a short period of time; 0.5% converting in the first month and 4% conversion rate within a year. They have keenly analyzed their customers buying patterns and needs. So the question becomes how can free become profitable and to what degree? EverNote started with a variable cost per customer of 50 cents a month which has dropped to 9 cents as mentioned in the article. They know their costs and their customers’ needs by continuously providing additional services and upgrades.

The strategy just illustrated is not new but one that is applied in a number of industries often seen as introductory offers, discounted or free memberships to gain clients. It’s about setting an agenda, building your customer to become dependent on your products and services. It’s about knowing your true costs of selling and breakeven points. Free can be a profitable marketing strategy if your strategy and price points are aligned with your customer needs and buying patterns.

Diane Howerton
Regional Director
UC Merced SBDC Network

1 comment:

Sonia said...

The last sentence is well said! The needs and behavior of the customer should always be studied, as these change from time to time. A company can analyze and strategize better to gain loyalty and profit as well.

Sonia Roody