Why Customer Loyalty Is the Key to Real Wealth

You want to know where the REAL money is made?

Where you can make 20x more money in your business or investing?

The real money is not in always getting new customers. It’s in developing a loyal community of superfans that keep coming back to your brand.

The real money is in customers returning again and again.

The real money is in creating loyalty.

It’s NOT in constantly trying to drag new customers in your store for the first time for a one-time sale using expensive advertising.

Yet this is what many businesses do.

Don’t take my word for it.

How about one of the wealthiest self-made men in the history of humankind?

“The way management treats the associates is exactly how the associates will then treat the customers. And if the associates treat the customers well, the customers will return again and again, and that is where the real profit in this business lies, not in trying to drag strangers into your stores for one-time purchases based on splashy sales or expensive advertising.  Satisfied, loyal, repeat customers are at the heart of Wal-Mart’s spectacular profit margins” -Sam Walton, author of Made in America (total family net worth $149+ billion. Yes, he started with one store.)

Southwest Airlines and Richard Branson seem to agree:

“‘Everything begins and ends with our people. If we keep our employees happy, they will keep our customers happy, who will then reward us with their loyalty. That repeat business rewards our bottom line and creates value for our shareholders.’ So too at every Virgin company, none of which could survive without the dedication, energy, wit and wisdom of our incredible family of people.” -Richard Branson quoting Southwest Airline’s perspective on employees and agreeing, from the book The Virgin Way

Recently, I watched an interesting interview between CEO Ramit Sethi and Kevin Hillstrom of minethatdata.com

Kevin explores a lot of data from different companies. He seemed to find that not all companies should focus on the repeat buyer. He noted that most case studies arguing this focused on large chains with low-priced products that relied on repeat buyers like Target, Walmart, or McDonald’s.

But what about premium-priced, one-time purchase products, like wedding rings?

I thought that my theory might be wrong. But then I saw an interview from the billionaire John Paul DeJoria.

He said that even if you’re in a high-priced one-time order business, you should never focus on the sale. You should focus on the resell, or in this case, the referral.

That person won’t buy again, but he’s more likely to refer someone if it’s good.

So yes and no. My theory was somewhat wrong. You should always focus on building the trust of the long-term customer. And for high-priced one-time product businesses, you should still do this, but do it for the referral. And you can often get more benefit from doing this than just underemphasizing your past customers and overfocusing on your new ones.

The real money is in the long tail.

That’s one of the central themes of the book Reminiscences  of a Stock Operator, something that took the author his whole life to figure out. He literally tried all sorts of things: gut feeling investing, day trading, frequency trading, riding the waves, and so on. (It’s also a story of the dangers of that type of trading, but that’s a story for another day)

By long tail, I mean the long-term.

Some people may make 1 million dollars here or there, but they create a bad reputation, a horrible company, and horrible staff.

The billionaire John Paul DeJoria was interviewed in the book The Education of Millionaires. It turns out he also focused on the long-term. He said he focused on the re-order, not the initial order. It’s more important to have a great product that will get your customer returning time and time again rather than a one-time sale or scam, where the product or service turns out to suck and they never return.

The famed marketer Jay Abraham used a similar tactic to make money when he was broke. He trusted that a product was good enough to get people to return time and time again. It was an ointment for elderly individuals. The company was struggling so he did something unthinkable: he lost money in order to give one bottle of the product away to everyone. Why? Because he trusted that they would return and buy more and more to make up for it.

Note: Beware of the entrepreneur’s arrogance of believing their product is great when it actually sucks and no one wants it. Jay was street smart enough to know the difference.

They are also unable to replicate the process.

But the real money (hundreds of millions, billions, an enduring brand, a company that lasts, and loyal repeat customers) is in sticking with something for decades and decades.

In Tony Robbin’s book, Money: Master the Game, he gets the best investing advice he can for the common, average man by learning from dozens of the best investors of the age, something only he has the connections to do.

A couple allude to the power of the long tail.

As an important warning: for an average person, I suggest you read my definitive guide on investing. If you aren’t in any business and aren’t a full-time investor, you should diversify.

If you have a business where you have an edge, something you can control.. or you’re a full-time investor who can identify incredible businesses with a great edge in the market, that’s where you should put your money in.

Either way, the big money is in the long tail: holding that for decades.

When you got a winner, you stick to it. You don’t sell out.

Let’s take a look at some quotes from Tony’s book:

“I would also say, look, I personally think we have in general no clue about what will happen in five or ten minutes’ time, let alone in a year’s time or ten years’ time. We can make certain assumptions, and sometimes they look fine and sometimes they’re bad and so forth, but we really don’t know for sure. That’s why as an investor, I would say you should be diversified. Now, not every investor can do that because some investors, they invest in their own business. If I have a business like I’m Bill Gates, then I put all my money in Microsoft—and that was, for a while, at least, a very good investment. Probably for most people, the best is to have their own business and to invest in something where they have a special edge compared with the rest of the market; where they have an insider’s knowledge. That’s what I would do.” -Marc Faber, the billionaire they call Dr. Doom, member of Barron’s Roundtable, where, according to independent observers, his recommendations have had the highest returns, almost 23% per annum, for 12 years in a row

“The two wealthiest guys in the United States—Warren Buffett and Bill Gates—how did they get their money? Bill Gates got his money because he owned a stock, Microsoft, and it went up eight hundred times, and he stayed with the trend. And Warren Buffett, he said, ‘Okay. I’m going to buy great companies. I’m going to hold these companies, and I’m not going to sell them because—correctly and astutely—compound interest or the law of compounding works in my favor if I don’t sell.’ ” -Paul Tudor Jones, net worth $4.6 billion

This is not a stock investing article. It can be applies to your business. Your skillset.

The point is that there is great power in doing what you know best.

If you really understand the entertainment business, for instance, and made your money in it because that’s what you know.

If you made your money as a musician or basketball player, don’t be like Justin Bieber, Selena Gomez or Shaquille O’Neil, all of which invested a ton in new tech start-up ventures.

Rick Fox spent $1 million to purchase a League of Legends e-sports team. 

I know that scene very well.

I would advise you only do this if you can lose all that money and not be financially scarred. Because you’re definitely dancing on luck, areas you can’t control, and areas you are not super knowledgeable in.

Money is hard to make. And easy to lose. (or one could say harder to keep..)

Don’t go off investing 100% of your money in tech stocks. This is exactly how James Altuicher lost tens of millions of dollars.

Instead, you either diversify or re-invest into your entertainment business.

As Warren Buffett puts it, you stay in your circle of competence.

One of my favorite investors, Peter Lynch, wrote 2 incredible books on investing.

His main theme in these books is “invest for the long haul.” and “find and keep winners”

It’s very Warren Buffett-like, even though their infrastructures differ so much.

Lynch had to learn these lessons the hard way through decades of mistakes. He sold companies doing well that soared.

He kept companies that kept going down the drain because he thought “it couldn’t possibly go any lower.”

Let’s not get too complicated here. I’m not an expert in this area either.

This is a quote from Lynch that Buffett quotes often for good reason:

“It’s sort of like watering the weeds and cutting out the flowers”.

What’s that mean?

It means don’t go selling off your baby. Don’t sell your prized winning business. Don’t sell your passion.

The flower is your business that has a great edge, that makes you incredible money, that you fully understand.

Selling it when it’s doing well is cutting a flower.

The weed is a business that sucks or you don’t understand well. It’s like spending your hard earned money on a tech stock that you barely understand. That’s watering a weed. 

Choose Long-Term Success Over Short-Term Gains and Glory

Every year, there’s a CEO or high executive of a big company that decides to choose short-term glory and profits over long-term profitability of a business.

In an ideal circumstance, you want to improve both short and long-term profitability while removing any ego satisfaction.

This can sometimes be done.

Other times, you may have to sacrifice short-term profits for long-term sustainability and greater profits.

Studying business history, I find this epidemic.

People don’t learn from history. I think it’s because people simply don’t study it or bother to read.

At all.

Rather, they care about what media, news, pop culture, talk show hosts, the general public, or Wall street thinks.

They would rather paint themselves as a hero to the public (because the public and Wall street often are easily fooled and have mob-psychology) at the cost of profitability and health of their company.

Here’s a couple examples from great books to illustrate:

After his initial success as head of Chrysler Motors, Iacocca looked remarkably like our four-year-old’s with the fixed mindset .They can choose short-term strategies that boost the company’s stock and make themselves look like heroes…
…Or they can work for long-term improvement-risking Wall Street’s disapproval as they lay the foundation for the health and growth of the company over the longer haul. As with Iacocca and others, the perception-usually Wall Street’s perception – was all-important. The reality less so…
Albert Dunlap, a self-professed fixed mindsetter, was brought around to turn around Sunbeam. He took the short-term strategy of looking like a hero to Wall street. The stock soared but the company fell apart. Lou Gerstner, an avowed growth mindsetter, was called in to turn around IBM. As he set about the enormous task of overhauling IBM culture and policies, stock prices were stagnant and Wall Street sneered. They called him a failure. A few years later, however, IBM was leading its field again…
He spent his company time on things that would enhance his public image and he spent the company’s money on things that would impress Wall street and hike up Chrysler’s stock prices.

-Mindset: The Psychology of Success, a book recommended by Bill Gates

David can reel off a long list of companies where he has seen this story-line playing itself out… Doing the ‘right thing’ in the long-term interested of the business was pushed to one side and as a result, a lot more than value was destroyed.
Starting in 2006, parcel delivery service CityLink had four CEO’s in five years who jointly erased 1 billion euros of value.
For startups too, the ability to develop the kind of healthy, people-focused culture that is so critical to a company’ sustainability is seriously impeded if from day one the primary focus is on short-term gains and rapid force-fed growth.

-from the book The Virgin Way, by Richard Branson

On Exit Strategies

One thing that used to put a bad taste in my mouth is this whole “exit strategy” people.

These are people who are looking to sell their business in the future and have planned this out before they even started. Now, I understand and respect that people have different goals. Some have the express purpose of creating something and then cashing out later. They’re not in it for the passion or the impact or purpose. They want to make money. And sure, some like the art of creating and passion is there too, but they also care about making bank to retire or get out.

I didn’t like it because from the start, they were asking questions like “Should I avoid putting a face to my business so I can sell out easier later and live on the beach?”

Cashing out can sometimes be a short-sighted strategy since its the passion that fuels you to continue doing something you enjoy for the rest of your life that keeps you persevering through tough times. Don’t just take my word for it:

“What is it with people who can’t even start building something without knowing how they’re going to leave it… You should be thinking about how to make your project grow and succeed, not how you’re going to jump ship. If your whole strategy is based on leaving, chances are you won’t get far in the first place…when you build a company with the intention of being acquired, you emphasize the wrong things. Instead of focusing on getting customers to love you, you worry about who’s going to buy you. That’s the wrong thing to obsess over.” -Jason Fried, founder of 37 Signals, author of Rework, NY times best-seller (I rate it 4.4/5. Read it!)

“For startups too, the ability to develop the kind of healthy, people-focused culture that is so critical to a company’s sustainability is seriously impeded if from day one the primary focus is on the short-term gains and rapid force-fed growth. I am always alarmed when I hear start up leaders talking more about fulfilling investors ‘exit strategy‘ than about creating a great product around great and happy people. In many cases, the exit may well arrive involuntarily and much sooner than the strategy ever foresaw!” -Richard Branson, net worth $5.1 billion, author of The Virgin Way (4.6/5. Read it!!)

The point is that building something from the start to “cash in” and “sell out” is wrong on so many cylinders:

  • You probably won’t create a great business because your focus is not on taking care of customers or employees
  • Your whole mission statement to your core is to make millions rather than anything more meaningful, even if you deny it
  • It bleeds through and reflects through in your company

Some people succeed doing this.

Some have made millions doing this.

It’s very rare and that sort of thing usually doesn’t lead to a great, enduring company down the line.

If it does, it is an extremely rare case, it’s because the company who acquired you is spectacular, not you.

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By Will Chou

I am the the founder of this site and I am grateful you are here to be part of this awesome community. I help hard-working Asian American Millennials get rich doing work they love.

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