Customers need reasons to be loyal. Typically this relates to how their experience of the brand, its products and services matches up to expectations. Customers can demonstrate significant loyalty even in cases where the price is higher than available elsewhere, and the quality is objectively the same. In this way, some customers can demonstrate “loyalty beyond reason” toward certain brands. It’s worth remembering that customer loyalty is always exercised as a matter of personal choice – different people feel differently, even those who’ve had the same experience.
In this post we will cover:
What is customer loyalty?
Customer loyalty is the likelihood of a customer continuing to buy products and services from the same brand. It’s a measure of how devoted customers are. The range goes from very loyal at one end to very disloyal at the other. Many customers, who are disengaged from the organizations they purchase from, may be neither loyal nor disloyal.
Organizations with a strong reputation for customer service and support often perform among the strongest in terms of customer loyalty. Many people are just loyal because it’s convenient e.g. always using a grocery store because it’s the nearest to their house. Others have been incentivized toward increased loyalty, such as via a loyalty program. Some find their loyalty engaged by sharing the same or similar values as those professed by a brand’s marketing.
Customer loyalty is identified via two principal sources:
- Financial reporting data showing instances of purchases and repeat purchases
- Survey feedback expressing the current opinion and likely future intent of individual customers
We explore the measurement of customer loyalty in more detail in a later section.
What are the stages of customer loyalty?
Customers aren’t immediately loyal; it’s something that needs to grow over time in response to triggers and other factors. It stands to reason that an individual cannot be loyal to, for example, Delta Airlines, until they have flown on a Delta airplane. But, conceptually, loyalty begins before then – as a consumer of Delta’s brand via advertising, branding, other public messaging and word-of-mouth. All this would have built a view in that person’s mind about Delta’s competence, quality and other key attributes. And that has a part to play in that individual’s future prospects for loyalty.
Continuing the example a little further, we already stated that the individual can’t express loyalty until they’ve flown on a Delta airplane. That’s true to an extent, but what if the individual isn’t free to express their loyalty? For example, as a business passenger that gets put on whatever carrier their employer sees fit? Here, taking a flight is a significant part of the Delta customer experience, but not all of it if the person wasn’t required to shop around for alternatives, go through Delta’s online booking system, make payment, etc.
The stages of customer loyalty act as a ladder, the top step of which is a high and stable state of customer loyalty and commitment. Some experts refer to as many as 8 steps. Our simplified loyalty ladder has 5.
Individuals at the prospect stage are not yet customers, but they could be. They don’t have a known purchase history and their ‘experience’ of the brand is indirect or second-hand. Loyalty is nil. However, their perceptions matter as does their potential intent. Once properly understood, these can be used to target sales and marketing activities aimed at customer acquisition (i.e. converting the prospect into a customer).
Prospects could be just about anyone, but are only really applicable if they have a need for the product or service. That’s a very broad net if you’re Pepsi, for example. Significantly less so if you’re a local architecture practice.
In this definition, the ‘customer’ is simply someone that has transacted with the organization. They have purchased something, potentially multiple times. More than likely they are a one-time purchaser and it’s unclear whether they will be back for more – and for what reasons. Even if they’ve bought a few times in the past, there is no pattern or predictability to their purchasing. They are an enigma with enormous potential to be grown into a loyal and therefore far more valuable customer.
These ‘customers’ have been acquired in one sense, though perhaps not properly onboarded or introduced to the brand. The primary objective with this group is customer retention as a precursor to encouraging greater customer loyalty.
We’ve used the word “Client” on purpose, to delineate from “Customer”. In this model, clients are repeat customers. Their propensity to choose the brand is somewhat habitual, but this could be for many reasons. Understanding the reasons for loyalty at this stage is crucial to being able to continue it.
The objective here is once again customer retention. These efforts are important to prevent them sliding down the ladder from being a repeat customer (Client) into being a sporadic customer. Ultimately the intention is to drive and facilitate them to go further up the ladder to greater loyalty.
Your organization may not operate a membership-based business model. That’s OK, because “Member” is simply shorthand for a type of customer loyalty shared by people who’ve really bought into your brand.
The chief characteristic of a member is their willingness and commitment to purchase across your product/service portfolio. In effect, your customer retention cycle has been sufficiently successful to have allowed you to upsell and create added value. A good example is the archetypal Apple customer, who may have originally purchased an iPhone a decade ago and since chosen iPhones each time they renew their smartphone contract. As a ‘Member’ (whether or not they are in fact members of an Apple loyalty program), this individual has also purchased Apple AirPods, an iPad and an Apple TV subscription.
This is about as positive as it gets from a direct revenue perspective, with “Members” each maximizing their spend at every relevant opportunity. However, there is one further stage above this on the customer loyalty ladder.
Advocates are your fans. The people who exude positivity toward your products and services and share this passionately and energetically with others. They are champions for what you do; evangelists for the customer experience you deliver. Their value to you is expressed both in direct revenue and in referrals and recommendations to others who trust them.
Advocates are the topmost rung of the customer loyalty ladder, but also your link back to all other stages beneath. Advocates can influence the purchase decisions of prospects, the repeat proclivities of customers and the cross-portfolio preferences of clients.
Why is customer loyalty important?
Organizations survive, thrive and grow through customers. More customers equals more revenue, which explains why customer acquisition is the leading objective for sales departments. However, organizations that neglect customer loyalty and fail to retain existing customers suffer from the ‘leaky bucket effect’.
The leaky bucket effect
A leaky bucket is one that drains water. In our analogy, this draining away is customer attrition; the inevitable loss of customers over time. Very few if any organizations keep all their customers forever so some leakage is all but guaranteed. It’s a question of how fast or slow the rate of leakage is. The mistake that many organizations make is, instead of plugging holes, they focus disproportionate efforts on putting more water (customers) into the bucket.
The company that invests time, effort and resources acquiring new customers is guilty of phenomenal waste if they are unable to retain those customers. With high customer attrition, all that water going into the bucket is struggling to maintain the same level. This can even create a self-defeating cycle where increasingly desperate attempts to acquire more customers end up diverting crucial resources from retaining them.
The only answer – the only way of plugging the leak – is through loyal customers. Customer loyalty arrests the drainage effect and allows customer acquisition efforts to deliver net benefit. Loyal customers in full advocacy mode can even serve to boost customer acquisition activities.
5 benefits of increasing customer loyalty
Customer loyalty is incredibly beneficial in ways that are incredibly obvious. However, there are further associated benefits that might otherwise be easy to overlook. Here is a comprehensive roundup of reasons why pursuing a customer loyalty strategy makes good business sense.
Customer loyalty enables a repeatable formula for customer trust
Individual customers are loyal for different reasons, but closer inspection will reveal common themes. Once you know why customers are behaving with loyalty, you can make these drivers more innate to your business approach. For example, by making changes to your customer support experience that you can see trigger increased loyalty metrics. This has the effect of creating a repeatable formula you can deploy across all your locations, services, products and staff.
The other aspect of this ‘loyalty formula’ is that it signifies and represents trust between you and loyal customers. This is because loyalty is given in anticipation of an expected return. For example, vacationers return to the same resort complex each year because they are so confident their cherished expectations will be met. This trust is enormously significant in the connection between organization and customer, strengthening ties, shutting out competitive threats and providing a legacy for future benefits.
You can invest with confidence when loyal customers are backing you up
Customer loyalty brings stability to financial planning and investment decisions. If you want to grow, invest in new equipment, hire new staff, expand premises – do it with the certainty of recurring revenue you can practically bet your life on.
This is just not possible when revenue predictability is compromised. Or when you’re distracted by having to soothe unhappy customers who threaten to churn, or hit customer acquisition targets just to cover this month’s bills.
Customer loyalty is great for profitability
Every business should know:
- Their average customer acquisition cost (CAC)
- The payback period they need to keep a customer for before that outlay is recouped.
The good news about customer loyalty is that long-term customers redefine the economics of ROI by making CAC a distant memory. The impact of CAC is relatively profound in year 1, after which the revenue gains are based solely on operating costs. So a customer you retain for 3, 4, 5+ years is highly profitable in comparison to customers you retain for 3, 4, 5+ months.
Profitability also gets a boost from the widely accepted fact that it is cheaper to sell to an existing customer than to acquire a new one. This is very important for organizations with a portfolio of products or a tiered service offering. Customer loyalty can indirectly reduce customer acquisition cost by reducing the necessity for expensive sales and marketing activities.
Last but not least, customer loyalty – as expressed by the customer retention rate metric – has been shown to increase profit growth. Research has found that increasing customer retention rates by just 5% can increase profits by 25–95%. One study, cited in Emmet and Mark Murphy’s book ‘Leading on the Edge of Chaos’, found that a 2% increase in customer retention has the same impact on profit as cutting operating expenditure by 10%.
Customer loyalty breeds brand champions, advocates and experts
You’ve gotta love loyal customers. Not only do they bring significant, predictable revenue – they also act as an extension of your marketing team.
The people who proactively share their experiences with others tend to sit at the extreme ends of the happiness and satisfaction spectrum. Customers that have a great experience will share that fact with friends and colleagues. They’ll post on social media and leave positive reviews. If anyone asks them for a recommendation, they’ll articulate why your brand is the best. Organic word-of-mouth like this is immensely valuable; literally the kind of marketing that money can’t buy.
Not all customers are loyal because they think you’re great. Some customer loyalty is driven by proximity, convenience, incentive, price or lack of choice. It’s really important to understand what drives customer loyalty so that you can maximize what you do next.
Most customer loyalty comes from customers who are fundamentally happy. There’s also evidence to suggest these customers are more forgiving too. So if you did mess up one time, a loyal customer is able to place that into the context of 99 times you didn’t mess up. A study found that NPS promoters (the most positive, loyal and likely to recommend) are 7 times as likely to forgive issues as other customers.
Loyal customers are a captive market
Research into the ROI of customer loyalty has uncovered the propensity for loyal customers to try new offers and repeatedly purchase. According to the Temkin Group, the most positive and loyal are 5 times as likely to repurchase and 9 times as likely to try a new offering, compared to other customers.
Customer loyalty also makes for more engaged customers that consume your content as well as your products and services. This makes them ‘warm’ prospects for upselling and cross-selling opportunities too. And if you want valuable user input into product development and road testing new ideas, loyal customers may be a useful first port of call.
Finally, loyal customers are more likely to respond to your calls for feedback. This is crucial to ensuring that customer feedback is representative and can be relied upon for decision making.
Types of customer loyalty programs
What better way to create customer loyalty than through a loyalty program? Customer loyalty programs are designed to encourage return and repeat purchases in exchange for some kind of reward. There is rather a lot of innovation around loyalty programs, with organizations becoming increasingly sophisticated in how they are designed and deployed.
There are 3 main types of loyalty program:
- Points-based reward program
- Tiered status and reward program
- Premium status program
Points-based customer loyalty program
This form of loyalty program is the simplest and most common. It is neatly exemplified by the ubiquitous “free 10th cup” card found in coffee shops all over the world. In this simple model, the customer is given a branded card and receives a ‘stamp’ each time they buy a cup of coffee. When the card is full of stamps, it can be exchanged for a free cup of coffee. The customer is rewarded with a 10% discount on all their coffee purchases by virtue of getting 10% of their coffee for free. The coffee shop benefits because zero discount is given until the customer’s loyalty reaches 10 cups.
Many grocery stores operate something similar. Tesco, the UK’s biggest supermarket, has run its Clubcard scheme for decades. Every pound spent in stores accumulates points that can then be redeemed for cash discounts and special offers. Through Clubcard’s partnerships, Clubcard holders can put points toward free admission to museums, theme parks and shows at the theater.
Points-based customer loyalty schemes are intended to galvanize habits and encourage customers to stick with a brand. They are designed to provide rewards in direct proportion to the amount of customer spend.
Tiered status and reward program
This kind of loyalty program is a good fit for organizations that offer tiered levels of service. Frequent flyer programs are a case in point. Most airline passengers travel coach, while far fewer travel business class or first class. Access to the higher status tiers is also limited by virtue of seat availability on airplanes. There are only a few first class seats, if any, on short-haul flights. Perhaps a few rows of business class or ‘premium economy’. The aspiration for all airline passengers (except those who always travel first class) is to travel in the next highest tier.
Airlines exploit this, and encourage loyalty, by allowing customers to gain access to higher tiers after making a qualifying number of trips. Someone who flies every week with the same airline will get to spend a few trips a year enjoying greater luxury, as well as gaining access to executive departure lounges, added discounts and bonuses. But if the customer stops flying for a period, perhaps because they are disloyally using a rival airline, their benefits lessen. Customers have to keep their loyalty going if they want the rewards, and the status that goes with it, to continue.
Premium status program
The premium status loyalty program is one that customers pay to be part of. That might sound very strange, but more and more examples crop up all the time. Among the most famous is Amazon Prime.
Amazon has a very large number of customers and a very large portfolio of products to sell them. But loyalty is always in question as long as there is competition with potentially better price, faster shipping or better service. Prime’s principal benefits are free expedited shipping on every order (a game-changer in itself) and 24/7 access to Prime Video, a major entertainment streaming platform.
By offering great benefits and making the program a chargeable annual subscription, customers are committed to using Amazon habitually. The charging aspect is totally justifiable, given the value of the benefits on offer. However, it also negates the issue with ‘free rewards’ – that something given away for nothing risks being perceived as worthless.
5 excellent customer loyalty program examples
Excellent customer loyalty programs have the following in common:
- They are easy to understand
- Very simple to join
- The rewards customers get are relevant and desired
- They bring customers closer to the brand experience
Here are 5 customer loyalty program examples we think are pretty awesome.
Rideshare company Lyft offers two kinds of loyalty program, one points-based and one paid. By offering customers a choice, Lyft demonstrates they are catering for everyone. And the kinds of benefits are directly relevant to the Lyft experience.
We like it because every Lyft customer can earn points on their Delta and Hilton loyalty programs. Customers also get Chase and Mastercard benefits when they use these payment cards.
For super-loyal customers there’s Lyft Pink, which costs $20/month but delivers a whole heap of extra benefits including a flat 15% discount on all rideshares.
O2 is Telefonica’s subsidiary in the UK and one of the country’s largest mobile operators. Its loyalty program, Priority, incentivizes pay-as-you-go subscribers to keep spending with O2 rather than switch to another cellular network.
It works by converting each customer’s monthly spend into a 5–10% cashback award that customers can then choose how to spend. This is great for putting customers in control, and allowing different kinds of customers to obtain the benefit they value the most. So, price-conscious customers invariably take the cashback. Others can put the award toward retail store vouchers or a new mobile device. Best of all, they can use the credit to buy tickets for concerts and shows at the 20,000 seat O2 Arena in London, or one of 20 O2 Academy venues around the country. Tickets go on sale to Priority members 48 hours before general availability.
Footwear retailer TOMS is a great example of a loyalty program with incentive options that orientate to charitable giving. That’s because TOMS as an organization is committed to ‘grassroots’ causes, which is a key part of its purpose. It therefore makes perfect sense to share this purpose with customers, enabling them to participate and be part of the company’s mission. Customers can choose to divert the value of their rewards to TOMS grassroots partners, or use loyalty points toward further purchases. The program also features three tiers.
While there are obvious benefits to customer loyalty by offering greater reward choice, the charitable option takes it to a new level. The desire to contribute to worthwhile causes may be a stronger hook for many customers. One that sustains loyalty because the customer doesn’t want to let anyone down.
Beauty brand Sephora’s Beauty Insider loyalty program is worth its place in this list by virtue of its runaway success. It has an astonishing 25 million members who are said to contribute as much as 80% of annual revenues. So what’s the secret?
Well first it’s simple ($1 spent earns 1 point) and also tiered. The further up the tiers you go the more exciting and exclusive the rewards.
Another likely factor is the fact that Sephora is a high-end brand with sought-after items that don’t come cheap. With desirable items and a loyalty program that offers discounted access to them, Sephora seems to have got the balance right in how the tiers are positioned and how much (up to $1,000) you have to spend to achieve them.
North Face’s XPLR PASS is a great example of a loyalty program that allows customers to live the brand experience. Even the name (XPLR – Explorer) makes customers feel like this outdoor apparel brand is capable of literally taking them places.
The basic elements are all there; discounted goods, early access to new products and kit, and even a thoughtful gift for you on your birthday. The added spice comes from the opportunity to participate in member-only exploration experiences that are closely aligned to the brand.
How to build customer loyalty
Here is a list of popular customer loyalty strategies used by organizations large and small.
Focus on improved customer service and companywide customer-centricity
We know that customer service and support has a big say in customer loyalty. But this isn’t simply the responsibility of the customer service department.
Many businesses are cottoning-on to the need for a universal culture change that places customers at the heart of everything they do. Ultimately, customer service is everyone’s responsibility. And being customer-centric is definitely something that customers appreciate long term.
One of the guiding principles for this strategy is consistency. Customers should receive the same quality of experience no matter what product they buy, store they frequent or agent they deal with. The same applies to communications channels like social media, phone, email and web chat.
Another principle is personalization; from addressing the customer according to their preference, all the way to remembering their birthday. Being thoughtful and occasionally even surprising clients with ‘delightful’ experiences is all part of the mix.
Establish shared values with customers
Research has shown that organizations that have values which align with those of their customers can inspire loyalty. This even goes so far as the company’s mission and purpose, and articulating this beyond simply making profits.
This tendency among customers is growing as demographics change. Younger audiences place the highest importance on values such as social justice and environmental responsibility. This makes it imperative for consumer brands in particular to address the right values and get these across effectively.
Make the customer journey effortless
Buying products and services should be quick and simple. Leading brands have demonstrated this and set the bar high. If you aren’t “easy to do business with” then otherwise satisfied customers could abandon you without warning.
There are a couple of factors at play here. One is that being effortless is a competitive differentiator. Someone else will make it effortless for your customers if you fail to make it effortless enough. Another factor is that customers are time poor and have many other commitments and distractions of higher importance. You could have a very high quality offering at a fair price with great service – but if it’s hard work for customers then keeping them loyal could be hard work for you.
A good approach is to conduct a customer journey mapping exercise. This works well when coordinated with a ‘mystery shopper’ approach.
Many companies neglect the importance of the onboarding phase when bringing on new customers. This is a crucial time. Failing to properly onboard customers undermines their expectations. It could diminish the confidence they have in you delivering on your promises.
Get your employees bought in
Whatever your strategy for customer loyalty, getting all your employees enthused and focused on common goals is a must. Companies that put customer loyalty on the employee agenda will be more successful in coming together as a team to achieve their aims.
Happy, motivated and well trained employees are also crucial when cultivating loyal customers. These are the people your customers engage with after all.
Feedback can play an important role here too. Firstly, by using customer feedback to highlight best practice among employees and – conversely – where some employees may need additional support or retraining. Secondly by turning the feedback engine onto employees to understand their satisfaction levels and wider needs. Employee engagement surveys and pulse surveys have also been shown to increase employee loyalty.
Act on feedback fast and be seen to act on it
On the broader topic of customer feedback, it should be clear by now that listening to customers is beneficial to customer loyalty. Make your feedback process conspicuous but not invasive. It should be visible but not disruptive.
Most importantly of all, don’t limit your customer feedback system to only collecting customer loyalty metrics. There is huge value in acting upon customer feedback you receive, both on a micro (with individual customers) and macro level (on behalf of all customers or certain customer segments). Having a plan for dealing with customer feedback before it arrives allows you to respond fast – quickly enough to make a difference to live customer issues.
By acting on customer feedback and being seen to act on customer feedback you inspire confidence and therefore loyalty. “This is a company that respects their customers opinions / knows what customers want / acts on customer wishes” – is what you’re going for.
Survey more customers
This strategy is another that’s related to customer feedback and optimizing its impact on customer loyalty. Feedback collection is all well and good but are you proactively seeking feedback from the maximum number of customers? Waiting around for feedback to arrive will give you a limited picture of what’s really going on. And if it’s a ‘self-selecting’ sample rather than representative of all customers, you could be taking action based on biased results.
The more customers you survey, the more reliable your customer feedback insights will be. That’s important if you want a clear picture of what to improve and who to focus customer loyalty activities on.
Surveying more customers can also have the effect of improving customer loyalty metrics like NPS. This is because getting a representative simple attracts feedback from more passive and neutral customers – not just the ones at the extremes.
The key is achieving the highest possible response rates from your customer surveys. You can do this by ensuring that surveys:
- Demand almost no time and no effort to complete
- Are extremely easy for customers to understand
- Never disrupt the customer experience
- Are contextually appropriate to the customer’s experience
- Align with your company brand and values
- Seamlessly integrate with internal CRM platforms and communications systems
- Facilitate the automated collation and analysis of customer metrics like NPS
- Alert you to specific types of feedback in real-time so you can take appropriate follow-up action without delay
Create a referral program
If you use a metric like NPS, you can see how many customers say they’re likely to recommend you. With a referral program in place, you’re giving them the means to act upon this intent and be rewarded for it.
Referral programs are useful for both customer acquisition and customer retention. Ultimately the best people to engage in a referral program are loyal customers because they already have a predisposition to referring you to friends and colleagues.
The major drawback with a customer referral program is that customers require motivation and ‘leads’ – neither of which you can really provide to them. Loyal customers are more likely to possess the self-motivation to refer that comes from having a belief in your product or brand. They’ll also know which of their friends and colleagues are most appropriate to refer to you, based on their own expert experience.
Develop partner and user ecosystems
Customer loyalty is often tied up with the idea of ‘stickiness’. This is where the customer experience is ‘sticky’ in the sense of being:
- So highly compelling that customers are drawn to it habitually
- Almost difficult to ‘escape’ or ‘untangle’ oneself from
- Both of the above
One area where organizations are innovating is in partner and user ecosystems. These are networks of value, adjacent to the organization itself, that allow customers to access expertise, benefit and enjoyment.
Flavourly is a craft beer website that allows customers to design bespoke packages of their favorite beer types and brands. In addition to offering access to a variety of leading beers and micro producers, Flavourly also creates ‘collaborations’ with partners – unique new beer creations that would otherwise not happen and that are exclusive to Flavourly customers. This example of a partner ecosystem drives customer loyalty and allows the company to respond to new customer tastes in new ways.
User communities are different in that they bring customers together to connect and learn from each other. These platforms, typically facilitated via social media groups, also feature exclusive content from the brand. Some user communities emerge organically from customers themselves but can be difficult to sustain administratively. This is where brands can step in and get closer to customers, inspiring increased loyalty.
Create a loyalty program
We explore customer loyalty programs in detail in the section below.
What is the most direct cause of customer loyalty?
The biggest contributor to customer loyalty is difficult to nail down. This is because the willingness to possess, declare and act upon loyalty is a personal judgement and unique to each individual. It can also vary depending on the product or service at hand. For instance, catalysts for customer loyalty in respect of motorcycle purchases may be very different to those surrounding utility suppliers. And that applies to the same customer who may have different stimuli for each.
It’s certainly true from empirical evidence and large-scale customer surveys that circumstances play a part in loyalty. A local retail store may be preferred to a retail store 20 miles away, for example. Clearly some customers will be more price-sensitive than others, tending to be loyal to those suppliers that consistently offer the lowest market prices. But these rules don’t govern everything. Perhaps one particular retail store is worth travelling a long distance for. Perhaps a certain brand of shaving soap is habitually chosen despite being twice the price. Some people buy Ford because they’ve always bought Ford. Or give their vote to the political party that their parents or grandparents always have, because switching would be a grave disloyalty.
A recent Customer.com study found the number 1 factor affecting customer loyalty is a ‘convenient shopping experience’. Other factors included ‘easy to make purchases’ (effortlessness) and ‘customer service’. The only way to find out what drives your customers’ loyalty is to study them and ask for their feedback.
Importance of customer service on customer loyalty
Many customers like the idea of the brand, product or service before they’ve experienced it. Customer service is where reality really strikes. In many organizations, customer care is the wrap that comes with what’s being sold. It is a major element in customer experience. Companies that optimize customer service fulfil the expectations of customers and therefore optimize loyalty.
Great customer service can often inspire loyalty in spite of other factors that might ordinarily inspire disloyalty. Take price, for example. Studies have shown that many customers are happy to pay a premium if it means the customer service they get is good.
The other crucial aspect of customer service is successfully averting the opportunity for negativity and failure. Depending on the product, many loyal customers would happily never contact a customer service department. It typically happens because something went wrong and the customer needs help. This is a dangerous point in the customer relationship for organizations. The customer might already be angry or disappointed, or they might become that way if customer service isn’t fast, knowledgeable or personable enough for their liking.
Dealing with customers satisfactorily keeps them on an even keel emotionally and in respect of their loyalty. But customer service performance can also move the needle either way. A great customer service experience can boost customer satisfaction and loyalty, even if it immediately follows a failure episode (something called the service recovery paradox). It can also swing the other way, and dissolve customer loyalty in an instant.
How does customer feedback impact customer loyalty
Customer feedback has a huge part to play in customer loyalty. Here are just a few examples:
The customer churn rescue
Loyal customers aren’t just the ones who rave about you. A key aspect of customer loyalty strategy is customer retention: giving existing customers reasons to stay customers. Garnering customer feedback regularly allows organizations to track the satisfaction levels of customers over time. So if their satisfaction level dips, or you get a negative piece of feedback from them, you can jump into action and resolve the issue. The customer churn rescue is very reactive, using customer feedback as an alerting system. There are other ways to use customer feedback more strategically.
Learning lessons about what makes customers loyal / disloyal
Imagine if you collated all the data relating to feedback-driven ‘rescue missions’ preventing customers from churning. Analyzing that data to understand customers better gives you valuable business insights and improvement opportunities. This should serve to reduce churn triggers and improve customer loyalty metrics.
You can do the same when you identify customers who are especially positive and loyal; learning lessons on what you’re doing well that you can do more of. Customer feedback is vital to uncovering this.
Capitalizing on advocacy opportunities
What do you do when you find a happy, loyal customer? You should have a plan for maximizing the marketing potential of loyal customers. This could include encouraging them to leave reviews, post on social media and participate in case studies. Customer feedback is the catalyst for this process, coming in at the very start by allowing you to survey your customer base at scale. That way you can detect advocates from the outset, and find out in real time when existing or new customers signal they are advocates (e.g. by returning high NPS ratings).
Customer loyalty effect on LTV
Even small repeat purchases from loyal customers can add up to high LTVs.
Let’s take the hypothetical example of a local homestyle restaurant that has two contrasting customers of interest. One is the high-rolling, Mercedes-driving family man with lots of friends. His loyalty is expressed by celebrating his birthday at the restaurant for the last 3 years. The other customer is the old lady who, since 1986, has shown up every morning for a filter coffee and then stretches to an omelet on Sundays.
A superficial view of customer worth would place Mr Mercedes above the old lady because he’s worth a lot of money and has spent $350 of it in the restaurant on each of his last few birthdays. However, this obscures the fact that the old lady has brought it far more revenue over time, and continues to weigh in with at least twice Mr Mercedes’ annual spend. This is why measuring customer loyalty and LTV is so valuable.
How to measure customer loyalty?
There are several customer loyalty metrics; ways of measuring customer loyalty. Each has a proven methodology behind it and is widely used.
Customer loyalty measurement is used to determine one or both of the following:
- Evidence of customer loyalty and its material impact to date
- The likelihood of future customer loyalty
Understandably there is great interest in finding and using metrics that accurately predict the loyalty of customers not yet given. Such metrics use the subjective opinions of customers to produce their results, garnered via customer feedback surveys.
The customer loyalty metrics we’re going to explore further here are:
- Future Looking
- Net Promoter Score® (NPS)
- Customer Loyalty Index
- Customer Lifetime Value
- Customer Retention Rate
- Customer Churn Rate
- Repeat Purchase Rate
Future-looking customer loyalty metrics
Net Promoter Score® (NPS)
NPS is among the most popular customer-related metrics out there. It focuses on identifying customers’ willingness to recommend something to other people. Because of this it is widely accepted as the key KPI for customer loyalty.
The process of calculating NPS begins by posing a simple question to customers:
On a scale of 0–10 (where 0 is not likely at all and 10 is extremely likely), how likely is it that you would recommend XX to a friend or colleague?
From here it’s possible to assign every customer into one of the following three groups:
- Promoters (those who answered 9 or 10 on the NPS scale)
- Passives (answering 7 or 8)
- Detractors (answering 6 or lower)
The idea is that customers stating a high likelihood to recommend something are also loyal to it. This is consistent with the thinking behind the loyalty ladder, which places ‘advocates’ at the very top. Customers who classify as ‘promoters’ are effectively counted as being loyal, and ‘detractors’ viewed as potentially disloyal. However, the primary purpose of the categorizations is to arrive at an NPS score for the organization.
To calculate NPS score, express all 3 categories as percentages of the whole. Let’s say 25% are promoters, 60% passives and 15% detractors. With that done, discard the passives. They are ‘neutral’ for the purposes of the calculation. All that matters is the promoters percentage and the detractors percentage. Now subtract the latter from the former: 25% – 15% = 10%. You don’t need the percentage symbol any more; the NPS is just 10.
All NPS values exist on a spectrum from -100 to 100. Anything above zero signifies a customer base that is more predisposed to loyalty than disloyalty. A score of 10 is quite low, but not a disaster.
Read our NPS Ultimate Guide.
Customer Loyalty Index
Customer loyalty index (CLI) is another metric that relies on customer feedback. It is less well adopted than NPS but shares a similar approach. It is more broadly based, incorporating three questions instead of one.
CLI is useful if you have misgivings about the applicability of NPS for determining customer loyalty. CLI is intended to give a more rounded view of what constitutes loyalty beyond simply giving recommendations (what NPS focuses on). However, asking multiple questions of customers (rather than one) can have an impact on response rates and overall participation. Customers are invariably time-poor and dislike responding to surveys unless they are very fast, simple, clear and engaging.
The three questions involved in measuring CLI are:
- How likely are you to recommend us to a friend or colleague?
- How likely are you to buy from us again in the future?
- How likely are you to try our other products/services?
CLI is calculated by measuring the average score across the three questions. Each question has six response options ranging from “Extremely likely” to “Extremely unlikely”. Each response option has a value appropriate to the level of likelihood, descending in increments of 20 from 100 for the highest option to 0 for the lowest.
Like NPS, the usefulness of CLI is tracking it periodically for trends and improvement opportunities.
Evidential customer loyalty metrics
Customer lifetime value (LTV)
Customer LTV is the amount of revenue gained from a customer over a given period. This is typically the duration of the customer relationship. Every customer has their own unique LTV. Organizations will commonly calculate an average LTV across their customer base.
Calculate customer LTV by multiplying the annual value of the customer by the known or anticipated lifespan (in years) of the customer relationship.
The annual value of the customer can be discovered by reviewing sales figures. Organizations operating a CRM system or loyalty card program should have ready access to this kind of data. If data is not sufficiently detailed, the value can be determined by multiplying average purchase value by purchase frequency (purchases per year) – using estimations if necessary.
Here’s an example of a footwear retailer:
- Average customer spend per purchase = $65
- Average purchase frequency = Every 4 months
- Average customer value per year = $65 x 3 = $195 (since purchases occur three times per year).
- Average customer lifespan = 10 years (determined from business experience; customer demographics show buyers tend to be aged 16–26 after which they ‘outgrow’ the brand).
- Customer LTV = 10 x $195 = $1,950
This metric should be as high in value as possible. A high individual customer LTV is consistent with a loyal customer i.e. one who makes a large number of individual purchases of different things. LTV can be used in relation to Customer Acquisition Cost (CAC) to demonstrate the benefit of customer retention on the bottom line. Strictly speaking, CAC is often subtracted from LTV to arrive at a more representative LTV value.
Customer Retention Rate
The customer retention rate is used to measure customer retention during a completed period. It is expressed as a percentage value, whereby 100% shows that the number of customers at the end of the period is the same as at the beginning.
- Let’s say you have 1,000 customers at the start of the period, June the 1st. We call this value ‘CS’ (customers at start).
- The end of the period is 30th June, when you have 1,050 customers. We call this value ‘CE’ (customers at end).
- The difference is 50 customers, but this does not mean that you have a high customer retention rate. This is because of the third value, customers that you have acquired. During June you acquired 200 customers. We call this value ‘CN’ (customers that are new).
- Note that you can easily infer the number of customers lost during the month. In this case, if 200 customers were acquired for a net gain of 50 then you must have lost 150 customers during the same period.
Use the values for CS, CE and CN to complete the following equation:
Percentage customer retention rate = [CE-CN]/CS] x 100
With the numeric values added, this equates to:
= [1,050-200]/1,000] x 100
= (850/1,000) x 100
= 0.85 x 100
Bear in mind this is a raw customer retention rate, which is a useful metric. A more sophisticated KPI is one that applies monetary values like sales revenue and profit. These can then be used to calculate profit-adjusted and sales-adjusted retention rates.
Customer Churn Rate
The customer churn rate is the inverse value of the customer retention rate. You can use the same calculation as for customer retention rate, and then subtract this from 100 to arrive at customer churn rate.
For example, an organization with a customer retention rate of 90% has a customer churn rate of 10%. The choice of which metric to use is a question of being motivated by positivity or negativity. The churn rate draws attention to the failure of allowing a percentage of customers to churn; retention rate to the success of retaining them.
The customer churn rate should be as low as possible. The only exception would be if you are consciously deselecting customers because they are unprofitable or counterproductive to business objectives. In such instances, customer churn would be an intentional result.
Again, it can be useful to see the sales and profit implications of churning certain customers, as they are not all alike. Losing a single major customer could have a disproportionate effect. Conversely, losing a large number of relatively insignificant customers could appear disastrous but in fact be quite inconsequential.
Repeat Purchase Rate
Repeat purchase rate is referred to in the customer LTV section above. Having this data to hand in sales and CRM records is very beneficial to decisions around customer loyalty. Alternatively it can be estimated, or else deduced via customer feedback.
In fact customer feedback can be used as the backup process for all evidential customer loyalty metrics where hard sales data is not available, or to supplement findings and assumptions. By asking customers about their purchase habits – and levels of effort, engagement, satisfaction and general sentiment surrounding them – you can build an accurate and real-time picture of metrics like repeat purchase rate.
The future of customer loyalty
Customer loyalty is a simple principle that’s easy to understand. Despite this, many organizations that track customer metrics are only scratching the surface. Customer loyalty can be easy to identify but difficult to predict. Many just aren’t focusing enough attention on how to build and grow customer loyalty. A robust customer feedback system, coupled with a continual analysis of purchasing data, should help address this issue. However, this takes time – both to learn about what makes your customers loyal, and executing plans to make that happen.
The future of customer loyalty will include more diverse motivations and drivers. In the past, price, location and service would have been the major factors, and these still rank highly today. But customers are more motivated than ever by choice, effortless experiences and finding brands whose purpose they believe in and associate with.
Net Promoter Score has been around for nearly 20 years and is used by organizations of all sizes, on every continent. Its enduring value reflects the simplicity of the concept and the need among organizations to generate certainty around future loyalty-related customer intent.
At the end of 2021, the creators of NPS at Bain & Co unveiled the third major version of their metric: NPS 3.0. The difference is the introduction of a new component called ‘earned growth rate’, the revenue growth generated by returning customers and their referrals. This adds evidential data to the subjective, real-time, feedback-driven survey data that underpins NPS.
Earned growth rate is closely aligned to the data required to calculate customer LTV. As NPS 3.0 rolls out and is adopted by leading businesses worldwide, expect to hear more about associated best practice for applying it.
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