(FORTUNE Magazine) – ARE YOU KEEPING your customers? You'd better be, because it's far cheaper to hold on to the ones you have than to acquire new ones. A happy contingent inside your tent lessens your need to beat the street for business. Loyalists may even drum up fresh prospects for you. The result: high profits. Frederick Reichheld, a consultant at Bain & Co. and an authority on loyalty, says, ''Taking customer defections out of a business is like taking friction out of a mechanical system. Defections steal energy and dissipate performance. When you improve retention, you create a highly efficient machine.''

Some marketers get the message. Doug Bergum, 37, CEO of rapidly expanding Great Plains Software, which creates accounting programs in Fargo, North Dakota, honed his loyalty-building skills as a kid in the grain elevator business his family still owns in nearby Arthur (pop. 450). ''In Arthur your customers are lifelong, and their grandchildren will probably be customers in 40, 50, 80 years,'' says Bergum. ''Keeping customers always seemed like common sense to me.'' Great Plains now draws kudos for client coddling, but most companies are just plain awful at it. They focus instead on chasing down the next sale, using discounts and promotions to draw brand switchers, and paying employees more for pulling in new accounts than for nurturing current customers. How do the best companies do it? The champions of loyalty -- including General Electric, Baxter International, and State Farm Insurance -- cite several keys:

-- Choose customers carefully. They're not all alike. If you were to trap a loyalist in a stereotype, he or she would be a middle-aged homeowner living in a rural area who buys what friends recommend at a standard price rather than on promotion. Is this 1950s redux? Now you know why smart retailers like Wal- Mart and Home Depot sell the old-fashioned way: everyday low prices, no sales. They're not looking for inherently disloyal types who adore discounts. Lately, famous-brand owners like Procter & Gamble have been swearing off roller-coaster promotions too. Says Chief Executive Edwin Artzt: ''In order to reward loyalty, we want our brands to be a good value every time they're purchased rather than a superbargain now and then.'' Companies with loyal buyers tend to serve homogeneous groups. Reichheld, the Bain consultant, says MBNA, a highly profitable bank that issues MasterCard and Visa credit cards, loses customers at half the industry rate. One reason: MBNA is the biggest issuer of ''affinity cards,'' used by members of organizations ranging from the American Dental Association to Ducks Unlimited, a wildlife conservation group. The group's logo gets imprinted on the plastic. Another loyalty champ, USSA, retains 98% of its auto insurance customers yearly -- vs. about 85% for the industry as a whole -- even though the military officers it specializes in covering are constantly on the move. Having designed its service around its customers' needs, USAA deals almost exclusively by phone and mail and operates a database in San Antonio that allows clients to travel anywhere without switching agents.

-- Once you win them, get to know them. Great Plains Software is a master at this. CEO Bergum, a former McKinsey consultant in Chicago, decided he missed home in 1983 and persuaded his family to help him buy the fledgling software firm. Still privately held, Great Plains is now the largest U.S. seller of high-end programs for accountants, with estimated revenues of $35 million last year. Software expert Jeff Tartar, who publishes Soft Letter, says, ''Great Plains has built an incredible reputation for serving its customers. That's an important competitive advantage in an industry where the products are a lot alike.'' How's this for getting close to the customer? Great Plains codes every program in a way that blocks its use after 50 transactions. The customer must call Fargo for the code that gets the program running again. At this point, the folks who man the phones ask some 20 questions about his business, computer system, and software requirements. Sound annoying? ''Customers don't seem to mind a simple phone call,'' insists Bergum. Now distributing through high-service dealers and consultants, he devised the registration system years ago when Great Plains was selling through ordinary retailers -- ''notorious for bad support'' -- and he wanted to keep in touch with users. Today Great Plains has some 45,000 buyer profiles in its databank and solicits personally -- as in ''Dear Mr. Smith'' -- those likely to upgrade. This year the company persuaded a phenomenal 42% of the owners of Great Plains Accounting Version 6 to buy new Version 7. These retention skills got dearly tested when Version 7 turned out to contain bugs. Concerned that his reputation for bulletproof products would be ruined, Bergum in August spent $250,000 to mail new disks to every Version 7 buyer. He also wrote all 2,700 Great Plains dealers, admitting that he failed to test Version 7 properly and offering cash compensation to anyone whose business suffered from the glitch. Great Plains' goof may have enhanced customer loyalty. More dealers wrote to praise Bergum's response than to claim restitution -- which amounted to $25,000, less than 0.5% of the revenues from Version 7 sales. Accounting Today magazine commended Great Plains for being ''a model of how problems should be handled.'' And at ''Stampede to Fargo,'' the company's annual dealer conference in September, Bergum won the crowd bigtime by standing on-stage, explaining his mistakes at length, and smashing three fresh eggs on his head.

-- Build the brand with fast, efficient service. Though many industrial companies lag in this area, General Electric understands the need for speed. Says Gary Rogers, 48, CEO of the $5-billion-a-year GE Plastics division: ''We're serving personal computer manufacturers whose product life cycles are now measured in months, not years. We have to be much faster at solving their problems.'' Rogers and a plastics team spent the past two years benchmarking smart consumer marketers -- L.L. Bean, General Motors' Saturn subsidiary, GE's own appliance operation, to name a few -- and plotting an overhaul to improve responsiveness. The result is a one-stop-shopping facility, opened in October, that pulls together in one place such functions as customer service, technical support, credit, pricing, and distribution. Plastics customers who previously called various representatives in different cities to fix, say, their Lexan polycarbonate resin problem now dial 1-800-GEPLAST for a preassigned rep. The fancy facility, at the entrance to GE Plastics' world headquarters in Pittsfield, Massachusetts, also has office and conference space for customers to use, with fax machines and other accouterments.

-- Listen to defectors. Companies tend to track satisfaction but ignore the customers who got away. Yet, says Paul Cole, a loyalty expert at Mercer Management Consulting in Boston, ''you can measure satisfaction till the cows come home, and you may still lose customers.'' Bain consultant Reichheld agrees, noting that on average, 65% to 85% of defectors say they were ''satisfied'' or ''very satisfied'' with their former supplier. A champion defector detector is a division of a division of giant Baxter International. Called MicroScan, this Sacramento, California, operation makes some $125 million a year of expensive medical instruments that identify microbes in patient cultures and indicate which antibiotics to prescribe. Three years ago, while MicroScan was battling rival Vitek Systems for market share leadership, the Baxter bosses got keen on customer retention and asked each division to analyze it. Recalls Scott Garrett, president of MicroScan's parent, Baxter Diagnostics: ''MicroScan insisted it lost customers only when they went out of business or got acquired. We were a little skeptical.'' Bain, recruited as truth seeker, interviewed customers and discovered Vitek was stealing quite a few vital specimens. The main attraction was Vitek's midrange analyzer, selling at about $75,000; MicroScan had no head-to-head competitive model. Newly committed to debugging its business, MicroScan began surveying 3,000 of its own and Vitek's customers annually, asking dozens of questions like ''How long did your equipment perform before it required a service call?'' and ''How quickly did the technical people come to fix it?'' The callers are supposed to engage defectors and clients who reduce orders in gripe sessions -- for a half-hour at least -- and dig up the roots of dissatisfaction. These changes and a new midrange product, developed for $15 million and delivered to market in a record 18 months, paid off big. Rick Wise, a security analyst who follows Baxter for Bear Stearns, estimates that MicroScan last year captured over 70% of the industry's new-equipment sales, vs. less than 50% in 1991.

-- Retain workers who retain customers. Buyers deal mostly with regular employees rather than with top executives, so employee satisfaction powerfully drives customer loyalty. The link gets ignored by many companies, particularly banks, where teller turnover averages 50% to 100% annually. Notes Reichheld: ''Banks are notorious for rotating managers through a series of local branches.'' Anywhere she works, a manager has slight incentive to build loyal clients, knowing that her successors will reap the benefits. And when she leaves, she takes her knowledge of customers with her. Little wonder that Great Plains, so smart about keeping customers, is adept at retaining employees as well. Turnover is less than 7%, vs. the software industry average of 15% to 20%. What keeps the 600 folks in Fargo? Careful selection. With headquarters planted between a bingo parlor and a wheat field, the company has expanded by 20%, or 100 workers, in the past five months alone but hires only one of every 27 who apply. At least four managers -- and sometimes Bergum -- interview each prospect, always asking: ''What's an example of a customer service experience you've been frustrated by? And an example of yourself giving great customer service?'' ''A lot of people can't answer the second question,'' says Bergum. The affable CEO, who wears white sneakers sporting the Great Plains logo even to formal functions, used to take every new employee to lunch, table for two. He still does lunch, but now it's eight or ten recruits for pizza in the park or fine dining at the Fargo Holiday Inn. State Farm Insurance blows away rivals in rankings of customer retention, market share, and profits. The key: painstaking recruitment, training, and care of its agents. Applicants, preferably unjaded types who never before peddled insurance, weather a year-long blitz of interviewing, testing, and visiting with agents -- some 200 hours altogether -- before finding out if they'll be hired. Disciplined and purposeful, the company's senior managers recently decided that this wasn't good enough. Beginning next year, anyone who wants to become an agent must work three years in claims, underwriting, or another department at the Bloomington, Illinois, headquarters or a State Farm outpost. A candidate who passes muster completes six months of agent training. What gives? Says vice president Chuck Wright, who oversees the 18,000 agents: ''It's just this changing, competitive environment. We have to prepare our people better.'' Agents are independent contractors permitted to carry only State Farm insurance. The company in turn sells exclusively through them. Says Wright, a 30-year State Farmer: ''If they feel that their company expresses loyalty to them, it's a whole lot easier to engender customer loyalty.'' The compensation system doesn't hurt either. Unlike most other agents, State Farm's receive as high a commission for renewing a policy -- 10% on auto, 15% on homeowner's -- as for opening a new account. Exceedingly productive, they bring in commissions averaging some $170,000 a year, or $102,000 net, after expenses. No wonder 80% of new agents are still around four years later. The industry average: about 30%. The loop is logical and complete. Loyal customers keep coming back. Costs decline because marketers need not scrape for new prospects. Employee retention increases as the pride in serving customers swells. Satisfied workers encourage people to buy more. Wise marketers keep this benign cycle turning by targeting customers carefully, nurturing the relationship, catching defections early, and treating employees the way they want them to treat customers. If your cycle doesn't run this smoothly, you're pedaling too fast to nowhere.

CHART: NOT AVAILABLE CREDIT: FORTUNE CHART/SOURCE: BAIN & COMPANY INC. CAPTION: BIG PAYOFFS FROM KEEPING CUSTOMERS