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Reichheld Loyalty Effect Model

The approach was developed by F F Reichheld and made famous when published by Bain&Co as a review of company profitability related to customer retention rates. The analysis was based on companies in the service sector and the model identified six factors that will allow companies to form a clear view of a customer's life-time value:

  • Cost of customer acquisition
  • Base profit
  • Increased profit from additional sales
  • Reduced operating costs of a loyal customer base
  • Profits from loyal customer referrals
  • Price premiums charged to loyal customers who are less price sensitive

Whilst the model is broadly correct in its predictions of customer behaviour the experience of many retailers in practise is that price premiums are very difficult to extract even from loyal customers.

In developed economies the consumer of the late 1990s actually wants it all, low prices, top quality, world class service standards, and delivery at a time to suit their needs and a location of their choice.

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