Building Customer Loyalty: Marketing Strategies That Work

Features - Business Management

"Relationship" marketing allows you to keep customers on a long-term basis. This, in turn, pays off in higher levels of profits and a stronger business.

Subscribe
November 23, 1999

How many times have you heard someone describe a business relationship as a “win-win” situation? What makes an exchange of lawn or landscape services for payment something other than “win-win?” After all, don’t both parties benefit from the transaction?

In theory, both the contractor and the customer benefit. But many savvy contractors have found that developing simple transactions into long-term relationships pays off in many tangible ways. According to several leading contractors, those long-term customers are better customers who help bring in more business, provide more profits over the term of the relationship, buy more services, pay less attention to competitors and are more understanding than those customers acquired by discounting pricing or other short-term marketing tactics.

What then is relationship marketing? Successful relationship marketers start by delivering high quality products or services at fair prices. They earn their customers’ trust by delivering what they promise. Those companies become the customers’ source of choice because they’ve learned to provide what their customers want. They add value.

SENSIBLE EXPECTATIONS. Sounds like a lot of work, doesn’t it? How can a contractor be expected to spend the time and effort necessary to develop these long-term relationships? What, exactly, has to be done? It doesn’t matter whether the customer is low-end residential or a large, national firm — the principles of relationship marketing hold true. Smart marketers know their customers. They want their customers to be bonded to them, to be delighted with them, to be loyal to them.

“Every customer is different,” noted Wayne Richards, president of Cagwin & Dorward, a commercial landscape firm in Novato, Calif. “Some want price competitiveness, some want to spend less time with the landscape and some want a single-source provider. It’s what’s important to the individual client.”

His company’s Total Quality Management program focuses on providing what is important to the customer. The employees try to exceed customer expectations, often with interesting results. “Some customers don’t want their expectations exceeded,” he explained. “They say, ‘Just give me what you think I need, and if you find a way to save me money, let me know.’”

The trick is in using marketing to establish customer expectations that are reasonable. The contractor who charges rock-bottom prices cannot afford to have customers who expect top-dollar treatment. Low prices mean that operations must be run on a tight rein, without time for the “extras” that help cement relationships.

Customer expectations are formed when the contractor presents the service concept through one-on-one discussions, company literature and word of mouth. A long-term relationship starts with giving customers clear expectations of what services they will receive. The next step is delivering what was promised and sometimes, delivering more.

BUILDING RELATIONSHIPS. “We’ve pushed the last seven or eight years to improve customer service and build relationships,” said Bob Ottley, president of One Step Lawn Care Inc., N. Chili, N.Y. “This means we hire our technicians year-round and they’re responsible for the sale, the service, building relationships and getting renewals. I think it’s harder for the customer with a relationship with a technician to drop a service for a particular reason. When they don’t have a face and a name and someone they’re comfortable with, it’s easier to cancel.”

Dale Amstutz, president of Northern Lawns Inc., Omaha, Neb., takes another tack. “We consider ourselves to be in the education and information business. We leave a newsletter with the invoice for customers at each of their five applications. We also leave an instruction sheet telling about the product we applied, what they need to do for their lawn, seasonal tips on mowing, etc. It goes a long way and cements our relationships.”

Northern Lawns takes this a step further during the season’s last application. “When we apply our winter fertilizer, we talk to the customer about renewal and tell them that we’ll come back in the spring, so they know it is a continuing service. We ask them in the fall when the lawn looks good and everything is going great — it’s the best time to approach customers.”

Ottley’s customers sign a written contract each year, a practice that the firm has done for some time. “We usually send our renewal contracts before Thanksgiving, but this year, we’re sending them in early January.” Although his competition offers a continuous service, his firm uses yearly contracts as part of its marketing strategy.

The Cost of Losing a Customer

    Marketing experts say that the cost of attracting a new customer can run as much as five times the cost of keeping an existing customer happy. Even if you spend minimal amounts on advertising, mar-keting and sales, it still takes time for new customers to come up to level of profitability of existing customers. In fact, some experts estimate that it may cost 16 times as much money to bring a new customer up to the lost customer’s level of profitability.

    What is the cost of losing a customer? One way to figure it is the cost of attracting a replacement customer. Figure your combined direct costs first, which include any advertising and promotion, other marketing programs and the cost of sales people. Let’s say the cost is $100 per customer. This figure doesn’t count all the indirect costs associated (administrative, planning, operations). Then figure your average customer revenue. For this example, let’s say it’s $900. The average number of loyal years may be five, and your profit margin is 10 percent. Here’s the computation:

      Average revenue per customer: $900
      Loyal years X  5
      Profit margin X .10
      Profit per customer: $450
      MINUS: Cost of a new customer: $100
      Profit per new customer: $350

    In this case, the lifetime profit from an average customer is 4.5 times higher than the cost of attracting a new customer. But let’s look at the larger picture. Let’s say you have approximately 1,000 customers every year and a turnover rate of 25 percent. That means you have to replace 250 customers every year. At an estimated cost of $100 to replace those 250 customers, you will have to pay $25,000 just to keep even.

    What was the potential profit from those lost customers? Multiply your potential yearly revenue ($900 x 250) by five years and 10 percent profit. That’s equal to $112,500 in lost profit. Add in the $25,000 to attract new customers and the turnover costs you $137,500. And that’s just the cost of one year’s turnover in customers. If this is a continuing pattern, lost profit potential will be much higher.

One Step provides a complete soil test for every customer every three years. “A customer’s program may change from year to year,” he explained. “Also, I enjoy knowing for sure that they want us.”

Lawn Classics Inc. of Findlay, Ohio, also uses soil tests to build stronger relationships. According to Doug Hague, president, the tests accomplish two goals. “Last year, we tested all our customers at our expense because we hoped it would reduce our cancellation rate and show that we’re willing to go the extra yard to be scientific in our approach. The second advantage was the tests also gave us a chance to learn their lawns’ needs, which pretty much verified what we had suspected.”

He said Lawn Classics made up most of the expense through sales of soil amendments based on the test results.

TURNOVER RATE. Unless a contractor builds a business solely on one-time projects, turnover is a fact of life. Although some customers leave and new ones replace them, certain levels of turnover are part of the lawn and landscape contracting business.

While there are no hard and fast indicators of a “typical” customer retention rate, several contractors believe that smaller, locally owned lawn care firms may have lower turnover rates than larger companies. They stated a range from 50 percent retention up to 95 percent retention, with a rate of about 80 percent retention being what they call “average” for mid-size firms. Whatever the rate, the cost of losing customers can quickly escalate (see sidebar above).

SIGNUP RACE. Beating the competition to the punch takes many forms, one of which is using prepayment discounts to encourage customers to sign up for the coming year’s service. Hague sends prepayment letters in January and offers customers a discount until mid-March. Approximately 20 percent of his customers accept the offer.

Amstutz’s customers get a more significant discount early in the prepayment program (late fall) and a smaller one closer to season’s startup. He estimated that a rate of 20 percent to 40 percent of customers prepaying may be typical for the lawn care industry. His firm, which has used the method since the company was formed 16 years ago, averages between 30 percent and 35 percent prepaying customers.

“When the company was young, it was a necessity to keep the cash flowing through the winter. I looked at it from the standpoint that if I borrowed money from the bank, I’d have to pay 10 percent interest, so why not borrow it from the customers and pay them 10 percent?” he asked. In addition, prepaying customers have a different mentality, he feels. “They’re more committed, more likely to refer us and more trusting of us. Plus, we don’t have to wrestle them for the money.”

Tim Doppel, president of Atwood Lawncare Inc., Sterling Heights, Mich., also sends out prepayment letters around Thanksgiving. In an effort to regain lost customers, his company sends a separate mailing of letters in the early spring asking the former customers to return.

“We acknowledge in the letters that we may have goofed and say we’re serious about wanting to correct the problem. We give them a coupon worth dollars off for their first application if they sign back up with us,” he explained. “This works surprisingly well.”

Sometimes, the rush to sign up new customers can bring back old ones to Atwood. “Unless they’ve found someone else in the spring, our lost customers are usually inundated with information from the competition,” Doppel noted. “In some cases, they try us one more time because at least they know what Atwood’s all about. We track these customers who return, and they become very loyal customers. They are my VIPs.”

CONTRACT NEGOTIATIONS. Contractors involved with commercial business have different customer concerns and operating parameters than residential services. Typically, property managers have specific price and performance requirements, plus the added factor of using bids for contracts. Under that kind of pressure, how can a contractor successfully build a long-term relationship?

“Environmental Care wants a long-term relationship with clients. Therefore, we try to minimize short-term thinking,” explained David Hanson, vice president of Environmental Care, San Jose, Calif. “We may invest in a project now to keep a client over the long haul. If it’s the right client and the right type of work, keeping that client is important.”

He pointed out that despite the pressure on property managers to keep costs contained, most clients will understand a contractor has to make a profit. “The pressures of their work require property managers to be extremely diligent about keeping costs under control.”

The nature of the business may cause property managers to take the short-term view because they have to maximize the owner’s profit, Hanson explained. “This can get in the way of relationship building.” As the economy improves and property managers are able to pour additional resources into landscape projects that had been deferred, the potential for building longer-term relationships grows.

What happens if a contract comes up for renegotiation and you have to ask for more money? Hanson recommended dealing from a position of strength. That starts with a project that is in good shape, he said.

“Use leverage to help them feel good about what you do,” he said. “If you underbid a job, instead of trying to cheap your way through it, do what it takes to do the job right. Then, explain that you blew the bid but did the job anyway, and ask for what you need. The property manager then has two options — put the job out to bid anyway or accept your approach and be supportive of you.”

He also recommended having a strategy suited to each customer’s needs, keeping in touch with the customer throughout the contract period and continuing efforts to help the customer see the landscape as a long-term project.

If the relationship does come to a parting of the ways, remember to leave it on a good note, Doppel cautioned. “Don’t give up on people who were your customers. If they cancel your services, make sure they leave on good terms. When they call to cancel, we tell them we understand and hope that when they’re ready, they’ll return to us. It constantly surprises me how many of them come back to us.”

The author is Editor of Lawn & Landscape magazine.