Investments in customer loyalty and engagement are booming.
Businesses are growing curious about learning more and more on – how to measure customer loyalty? what are the methods to improve customer loyalty?
Do you know the reason why?
Time and again, it has been proven that loyal customers have a positive impact by recommending your brand to friends and family with good word of mouth. It is not just mere speculation that they contribute higher revenues for brands they are loyal to.
According to PR Newswire, it is expected that the loyalty management market will grow from $1.4 Billion in 2015 to $4.0 Billion by 2020.
Evangelistic customers are much more effective in boosting the top line of a brand more than the marketing campaigns. This has led to the rise and popularity of loyalty programs. Accenture reports say more than 90% of companies currently have some form of customer engagement or loyalty program.
Here you can see the importance of customer loyalty in a hypercompetitive market.
Why measuring customer loyalty is important?
Customer loyalty is a strong predictor of a businesses’ long-term viability because loyal customers are durable. Unlike customers that feel neutral or even negatively about a product or service, loyal customers stay associated.
Loyal customers are identified to be more resistant to competitors’ marketing and more likely to purchase again, have higher average order value, and become brand advocates. By increasing loyalty, businesses activate their customers to market their products more credibly for little or no additional cost.
Businesses with a loyal customer base often enjoy:
- Higher revenues – Businesses that focus on customer retention have loyal customers. Forrester says, acquiring a new customer is five times costlier than retaining an existing customer. These customers stick to your business and help to extend lead pipeline and increase revenue growth.
- Improved brand reputation – Brand image is a valuable asset for any business. Customer loyalty and brand image are interrelated and help businesses to glue customers. You can win the trust of loyal customers, and they are more likely to share their positive experiences across people and channels.
- Reduced customer service costs – Loyal customers are cost efficient to serve. They are already familiar with a company’s products and services. This helps them to solve their issues by themselves or using self service knowledge base or FAQs. They can also share experiences, issues, solutions in the community.
- Higher customer lifetime value – Loyal customers will purchase more with you over time. Harvard Business School says, 5% increase in customer retention rate can increase profit by 25% to 95%. Increasing average LTV is an excellent lagging indicator for customer loyalty (i.e. when customer loyalty increases, LTV also increases.
Based on customer loyalty analysis, here are the key metrics and KPIs of how to measure customer loyalty and how you can make as part of a regular feedback loop.
How to measure customer loyalty: Metrics & KPIs
Before we dive into the key metrics to measure customer loyalty, let us discuss the three crucial methods that can not be ignored. These are the fundamental steps to be followed by businesses that strive to hold on customers by measuring loyalty index:
- Know your audience – Knowing your audience is very crucial. The more information you have about your customer base, the more effective your loyalty programs will run. By identifying your audience, their typical spending habits, their customer lifetime value (CLV), it will be easy to establish your initial benchmarks from this historical data.
- Outline your goals – After your customer base is identified, you have to define your goals to align your measurement practices and communicate them across the team. Whether the goal is generating more sales or increasing long-term customers, should be properly matched with customer loyalty metrics to help monitor the success or failure of each part of your loyalty program.
- Use the right tools for measurement – In order to monitor your loyalty campaigns accurately on an ongoing basis, choose the right toolkit to effective customer engagement in real time and simplify the analysis of your programs.
After you have segmented your customers, defined the business objectives, and selected the right tools, you can follow the key customer loyalty metrics. There is actually a loyalty spectrum. Customers can be an average loyal or extremely loyal.
By using the below customer loyalty KPIs you can identify how loyal customers are, and where more work needs to be done. Let us go one by one.
1. Customer lifetime value (CLV)
Customer lifetime value indicates the overall health of your business by showing you how much your customers are spending during their customer lifecycles. When your customers are loyal, they tend to spend more at your business, yielding greater lifetime value.
With the right calculations, you can easily grow your business. The CLV model can be broken down as a function of three elements:
- Single sale average – refers to the single average sales made
- Repeat transactions average – indicates the total number of times the customer make a purchase each year
- Retention period – average life of customer life (in years)
By using the elements CLV can be calculated entire customer base or a particular customer segment:
Extending the lifetime value of a customer is important for the sustainable growth of every business. After all, the value of a loyal customer acts as an invisible boon for businesses.
2. Customer Churn Rate (CCR)
Customer churn rate is also known as the attrition rate is a great metric for gauging customer loyalty. A low CCR is indicative of higher customer loyalty because there are fewer customers lost, but a high CCR indicates a larger percentage of customers lost and implies lower customer loyalty.
Customer churn rate and customer retention rate are like two different sides of the same coin The churn side indicates the customers lost over a period while the retention side represents customers retained over a period.
3. Net Promoter Score (NPS)
NPS (Net Promoter Score) survey is a simple yet effective metric to measure customer loyalty.
An NPS survey focuses on a key question – How likely they are to refer your brand to their friends and relatives on a scale from 1 to 10.
The customer responses are categorized as:
- Promoters (9 – 10) – Promoters are your loyal customers who continue buying as well as advocate your brand with good word of mouth.
- Passives (7 – 8) – Passives are your satisfied customers but are vulnerable to competitive offers and deals.
- Detractors (0 – 6) – Detractors are unsatisfied or frustrated customers who impact your brand with negative word of mouth.
The NPS metric is considered a good loyalty metric at the same time it is also closely related to business growth. For calculating NPS score you have to take the percentage of promoters (9-10) out of the total respondents and deduct subtract it from the detractors (0-6).
4. Customer Loyalty Index (CLI)
Customer loyalty index is a standardized tool to track customer loyalty and it incorporates the values of NPS, repurchasing, and upselling. It calculates all three values with a questionnaire similar to NPS on a 6-point scale – where1 stands for “Definitely Yes”, 6 stands for “Definitely No”.
- Would you like to recommend our brand to your friends or contacts?
- How likely are you to buy from us again in the future?
Your total customer loyalty index is the average score of the 3 responses. The answer scores: 1 = 100, 2 = 80, 3 = 60, 4 = 40, 5 = 20, 6 = 0.
The top benefit of CLI is that the score comprises all the loyalty values. By sending the questionnaire consistently over time, it allows you to systematically track changes.
5. Repeat Purchase Rate (PPR)
Ultimately, loyal customers are the ones that make multiple purchases. Therefore, it follows that your repeat customer rate would be a great measure of customer loyalty. RPR helps to understand how likely your customers are to return after their first purchase. Such insights can be used further for marketing campaigns to increase the number of returning customers.
It takes into account purchases from repeat customers divided by all purchases on the site for a given date range. The calculation results range from 0% to 100% with the higher the number the better.
Also by using tools like Conversific, you can view in the form of simple charts that indicates your new customers vs recurring customers and figure out the percentage of repeat customer revenue.
Five effective strategies to improve customer loyalty & methods
Customers become loyal when they get good value from any brand. The value varies from company to company. The crux is that customers should feel they are getting exceptional value, recognize that the product is meeting their expectations, and feel resistant to switching services.
To help customers identify with a product and increase the perception of value, brands can consider the below points on how to improve customer loyalty.
1. Build a great product
The best offense in the game for customer loyalty is to have the best product on the market. Value speaks for itself. If your website or application is conveying your brand message and helping customers to resolve their issues faster, it will attract them and keep them coming back.
When you have a strong product, here are the main benefits you witness:
- Better customer recognition – Having a strong product works to build customer recognition.
- Increased customer loyalty – Customers are attracted to brands with great products.
- More repeat purchase – When products are overall appealing, the repeat purchase rate rises.
If we talk about search engines, Google beats Yahoo by relentlessly investing its profits into improving its search algorithm to deliver more useful results. Users chose Google because it has become synonymous with finding the right answers.
***Learn more about building loyal customers, read Viber’s case study.
2. Deliver an excellent customer service experience
At products are never able to live up to their hype. In that case, support teams should focus on providing frictionless customer service experience and improve customer handoff. But by meeting customer expectations you can increase satisfaction but can’t build loyalty.
You have to put extra effort to exceed your customer expectations, which proves to be worthy. You can win your customers by delighting them with your exceptional service.
Ideas you can follow:
- Add surprise discounts before your customer checks out
- Send a free gift with a customer’s order
- Empower your customer service reps to go above and beyond for customers to a limit.
- Provide new customer or user onboarding
- Offer free shipping
3. Focus on effective communication
The effectiveness of communication is not defined by communication, but by the response. Milton Erickson.
Good and effective communication skills are key traits for improving the bottom line of every business. Whether it is internal or external, you should be able to communicate flawlessly to make it effective.
Having the right communication strategy is a great way to acquire and retain customers. Effective communication has a direct impact on the success of your business by following ways:
- Boost customer loyalty – Having personalized conversations builds trust and loyalty with your customers.
- Faster support – Effective communication with customers helps to learn the customer problem accurately and enable you to deliver faster support.
- Reduce touchpoints – With effective communication, the number of interactions required to resolve an issue can be drastically reduced.
- Increase conversions – Helping customers in real time help to close sales faster and increase sales conversions.
4. Make your brand stand out
In today’s competitive market, it is really difficult to separate your products from competitors. Your most profitable product today can be suppressed tomorrow by your competitors. This is the place where customer loyalty can help you a lot.
Your brand is what differentiates you in the marketplace based on your products and services. When customers recognize and back your brand, it helps lend a competitive edge to your company. The more recognition you receive and the more you build your brand, the more you will find that your brand elevates with more loyal customers.
This is an important factor that works behind Apple’s smartphone and tablet business. Except for Apple’s incredible product design and features, it has the highest customer loyalty in smartphone and tablet business. It truly helps Apple to stand out in this crowded marketplace.
5. Reward loyal customers
Who does not like to be appreciated and rewarded? We all have heard about rewards for success, so why not for loyalty?
So, rewarding loyal customers should be a core part of your customer loyalty programs.
If your customer buys from you frequently or generates new customers for your business, they should get something for it.
Here are some ideas you can follow:
- Create early access programs for premium customers
- Invite customers to special events to spread positive goodwill
- Celebrate your customers by featuring as them for a week/month
- Give unadvertised discounts to surprise customers
Final thoughts – Customer Loyalty Analysis
Customer loyalty is a precious asset for any business. It should never be taken for granted. By using the loyalty KPIs of how to measure customer loyalty will help your business in two major ways:
- Customer retention will significantly increase. The higher is your customer loyalty index the higher will be customer retention.
- Creating a brand and understanding your customer values, helps to increase customer loyalty. This will help you to keep your customers engaged and build long term relationships.