Ever seen a leaky pail that you’re trying to fill? It never gets full because as much as you’re filling up the top, there is water pouring out of the cracks in the bottom. Do you work hard to get customers? If they don’t stay for a 2nd purchase, you’ve got ‘leaky pail’ syndrome.

I’ve been reading the book we’ll be talking about at the next Business Book Discussion Group, The Loyalty Effect. Reichheld’s research in many industries and countries shows that just by increasing your customer retention by 5% (plugging a leak in your pail), you can increase your profits by 25 to 100%. That’s mind blowing, what would you do with 100% more profit? So how does that happen? Here are the 5 ways loyal customers build a business’ profit.

1. Base profit. Every time you sell a product or service there is the usual profit the business takes every time the purchase happens over the time period, for instance, 7 years. That remains stable.

2. Revenue Growth. When customers are loyal they buy more, sometimes more of the same product or service, often other things that your business offers. As they get more comfortable they buy even more.

3. Cost Savings. Repeat customer sales cost less to process, less time to take the order, fewer mistakes, better relationships between the buying person and the selling person with more trust, more knowledge of how that customer can be delighted or their sale customized, more order predictability yielding better business planning (Covey’s Speed of Trust is relevant here. We discussed that book in a previous Business Book Discussion Group. When trust goes up, speed increases and costs go down.)

4. Referrals. Loyal customers give very credible referrals and to people like themselves generally, who have the potential to also become loyal customers. The loyalty coefficient of the organization increases tremendously.

5. Price premium. Loyal customers usually are willing to pay full price because they see the value in what they are receiving and the people who are providing it. They aren’t looking for discount coupons and promotional pricing. They like doing business with your company and pricing is not their top issue. Loyal customers are like annuities. Their value just keeps on growing.

Reichheld also maintains that customer loyalty and employee loyalty go hand-in-hand. One doesn’t exist without the other. Happy employees generate happy customers and vice versa. Investing in your employees is a necessary component in increasing the employee retention and, therefore, the customer retention in your organization.