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Importance of Loyalty in a Hypercompetitive Market

Time and again, it has been seen that loyal customers convert friends and family into customers just through word of mouth, and they contribute higher revenues for brands they're loyal to. This isn’t merely speculation. Research by Bain and Company, cites that in almost no instance can a retailer break even on one-time shoppers due to the high cost of customer acquisition.

Evangelistic customers are much more effective in boosting the topline of a brand more than marketing any campaign can. This has led to the rise and popularity of loyalty programs. Surprisingly, even with an increasing number of businesses incorporating loyalty programs, almost 90% of social media sentiment on loyalty programs are negative.

Why Loyalty Programs Fail

Capgemini revealed this was mainly due to three reasons:

errorLack of relevant rewards for the customer

errorCustomer service issues

errorLack of a seamless multi channel experience

All of us are customers of one type or the other, so we know that it is vital to be offered actual value when we use a loyalty program. Earning a 1000 points over the course of a year which can only be exchanged for a box of tissues doesn’t really entice anyone to stay loyal to a brand.

A seminal article by Harvard Business Review claims that businesses must go above and beyond to ensure the delight of their customers, because absolute customer satisfaction is the key to long-term profits.

Additionally, companies today need to have an omnichannel offerings in order to succeed, since most customers use their phones and other smart devices constantly. By bridging the gap between the various devices, you create a seamless experience for them.

You may believe you have created the perfect product; you are certain your customer service and omnichannel experience is a cut above the rest, and that your business is incentivised for customers to return. But none of those beliefs matter if you can't measure the loyalty of your customers.

For that reason, here are 6 metrics to keep in mind while measuring customer loyalty.

Top 6 Metrics to Measure Customer Loyalty

1). Net Promoter Score

Ditch the traditional customer satisfaction surveys. Gauge your customer loyalty with a Net Promoter Score, which asks one essential question: How likely are you to refer our service? Not only does this let you know how satisfied a customer is, but it also tests how likely they are to purchase again--without annoying them with a long list of questions.

The customers answers with a value between 1 to 10, which segments them into one of the following categories:

  • Promoters. These are customers with a score of 9 or 10. They are your biggest fans, and are likely to not only buy from you again, but also recommend you to others.

  • Passives. Passives, or customers with a score of 7 to 8, may be satisfied but they lack the enthusiasm to recommend you to others. They wouldn’t be opposed to offers from your competitors.

  • Detractors. If a customer rates the service with a score of 6 or lower, they are considered ‘detractors’. They are dissatisfied customers who can damage your brand by communicating their negative experience to others, thereby impeding your growth.

It is best to follow up with detractors to understand why their experience was unpleasant. This can point you to actionable insights, and even help convert detractors into promoters.

To calculate your NPS, subtract the percentage of your detractors from the percentage of your promoters.

Bear in mind that the NPS score is representative of your customers’ overall perception of your brand, rather than only reflecting the quality of your products and services.

Complement the score with other metrics, like the demographics of your customer, in order to better understand who your ideal customers are.

You can compare your Net Promoter Score with the industry benchmark by visiting this Net Promoter Network report.

2) Repurchase Ratio

The repurchase ratio gives you the number of customers who come back to your business repeatedly, divided by one-time purchasers.

But why measure this ratio?

Most businesses focus their marketing budgets primarily on acquiring new visitors, usually through search and display advertising. According to a study conducted by Adobe, 40% of revenue in the US comes from returning or repeat purchasers who represent only 8% of all visitors. Numbers are similar in Europe, where 38% of the revenue comes from returning or repeat purchasers who account for 10% of visitors.

Insights into who your repeat customers are will allow you to alter your marketing strategy, so that you don’t waste your time and marketing budget on customers who are unlikely to purchase.

The idea is to bring your costs per acquisition down, and pull your revenues up.

Calculating the repurchase ratio depends on your business model. For a subscription-based retail, the repurchase ratio is simply the number of customers who are continuing their subscription divided by the number that cancel after their first contract period.

For transaction based business models, you will first need to calculate how many customers fall into the category of repeat customers. You can do this by calculating the average time between the first and second buys of all returning customers, as well as the standard deviation in the values. Repeat customers are those whose interval time between purchases fall within the limits of twice the standard deviation from the average time. The final repurchase ratio will be the number of repeat customers divided by the number of non-repeat customers.

Different consumers have different shopping patterns--they may be seasonal shoppers, or only be interested in specific products, or specific brands. To target every repeat customer individually--to know their purchases, their tastes, preferences and likes--is a complex and tedious effort, even for businesses with a small customer base.

Fortunately, today there are tools that incorporate artificial intelligence to help boost the lifetime value of your customers.

Personalize your customer engagement so that the marketing that reaches them is relevant to their purchase history, and offer omnichannel solutions. Deepen your understanding of your customer by using tools that analyze your consumer’s behaviour and preferences. And ensure to intelligently capture and reward customers that come back with a loyalty program. Additionally, utilize the opportunity of post-transaction emails to suggest relevant products for your customers. Personalized content resonates deeper with shoppers, and makes them more likely to make a purchase.

3) Upsell Ratio

Another indication of customer loyalty is when they buy new products; a symbol of their trust in your business. This is the reason why businesses track their upsell ratio, which is the ratio of customers who’ve bought more than one type of product to the customers who’ve bought only one. Don’t confuse this with the Repurchase Ratio, because this specifically tracks existing customers who buy a new product.

Up-selling and cross-selling are frequently interspersed with each other, but upselling is a customer buying a higher value option instead of the originally intended product.

Cross-selling is them buying more than the intended product. But the ratio takes these both into consideration because they are both vital components in a customer centric relationship strategy.

Businesses would do well to focus on upselling over new acquisitions. As the authors of the book Marketing Metrics state, “The probability of selling to a new prospect is 5-20%. The probability of selling to an existing customer is 60-70%.”

The success of specific upsells decrease over time, as offers get stale. By tracking the upsell ratio, you’ll know when to change your upsells.

It is important to keep the upsell relevant, and ensure that it adds value to the users purchase. Cross selling and upselling can kill conversations if not done right. As Neil Patel says, sell something that solves a problem. If you’re selling a knife, it makes sense to sell a knife-sharpener; not an expensive dishwasher, which reeks of slimy sales tactics.

4) Customer Lifetime Value

The Customer Lifetime Value (CLV) is an understanding of the total revenue attributed by the entire relationship (including future purchases) with a customer. Not only does this metric helps in identifying highly valuable customer segments that must be prioritized by your company, but it also encourages businesses to shift focus from quarterly profits to the long-term health of their customer relationships. This value is equally important to marketing teams, because it allows them to estimate their upper limit cost for acquiring new customers, and understand the time needed to regain the investment made on the customer.

The CLV of a customer is calculated based on their average purchase value, and multiplying that number by the average purchasing frequency to give you the customer value. This value is then multiplied by the average customer lifespan to determine the CLV.

Let’s take an imaginary store, PuppyWorld, as an example to calculate CLV. Based on all the customers that made purchases in a year, let’s assume the average sale value is 20$. If customers make purchases at an average of 5 times a year, the frequency rate is 5. The customer lifespan depends from business to business, based on analysing the number of years the average customer makes purchases. For a store dedicated to puppies, let’s take the average customer lifespan to be 1.5 years. The Customer Lifetime Value turns out to be 20 x 5 x 1.5 = $150

Knowing the CLV can help you accurately tweak business decisions about sales, marketing, product development, and customer support.

While the CLV can be calculated manually for past time periods, the most insightful CLV is reached by using a predictive model.

This requires using intelligent tools that predicts how a customer’s value will change over time. With the right tools, you can monitor the impact of management and marketing strategies, and determine the optimal level of investments in customer.

5) Customer Loyalty Index

The Customer Loyalty Index (CLI) is a standardized tool that is used to track customer loyalty over time. Even though customer loyalty may be your number one priority, it can’t be summed up in a single number. This is why CLI takes into consideration multiple factors like NPS, upselling, and repurchasing. It accomplishes this through a questionnaire addressing these three essential points:

check_circleHow likely are you to recommend us to your friends and family?

check_circleHow likely are you to buy from us again in the future?

check_circleHow likely are you to try our other products?

The CLI for a customer is the average score of their three responses. It evaluates these answers with values ranging from 1 to 6, where 1 corresponds to “Definitely Yes”, and 6 corresponds for “Definitely No”. The following numbers translate to the corresponding scores:

100
1
 80 
2
 60 
3
 40 
4
 20 
5
  0  
6

The CLI needs to be evaluated periodically (but not so often that it annoys your customers) to effectively keep track of loyalty.

This method allows for a more comprehensive understanding of your customer loyalty than a singular metric approach. Apart from this, it can also predict future retention rates, and help build loyalty profiles for your customers. But bear in mind that not all customers are going to be sincerely answering every question, so it is less reliable than measuring real behavior.

6) Customer Engagement Score

Another indication of customer loyalty is how heavily they utilize your services, and how engaged they are with your brand. PeopleMetrics conducted a study based on nearly 10,000 online interviews which revealed that high-performing companies have greater focus on customer engagement levels (62%) than those that perform poorly (46%).

Customer Engagement Score assigns every customer a score based on their individual activity and usage of your services. It allows you to group customers into segments (by demographics, product, account owner, etc.) to see how every segment is performing in comparison to other segments, and identify churn-risk customers within those segments. The numbers can also be used to predict whether your customers are likely to renew, upgrade or purchase additional products.

Compared to brick-and-mortar stores, customer engagement is rather easy to track for online businesses where nearly all interactions can be recorded. To calculate the customer engagement score, you can measure inputs such as frequency of usage, level of usage, number of actions taken by the customer, total time spent on activities, performance indicators, etc., to represent your customer’s success and engagement. We recommend the following metrics to track engagement:

track_changesActivity Time. This is the total time a user spends interacting with the offered service, factoring out idle time.

track_changesVisit Frequency. This records how often a user returns to your service, and is a key reflection of the value they get from it.

track_changesCore User Actions. If a user is consistently performing core actions, it is a good indication of adoption. For example, core user actions for a Project Management app would be creating and completing tasks, or inviting collaborators on projects. On the other hand, a lack of core user actions may indicate customer usability problems for your service.

Higher customer engagement is driven by better functional experiences (such as increased convenience, choice, efficiency) and emotional experiences (such as the customer feeling valued, the customer’s relationship with their representative, the customer’s trust in the service).

Ultimately, greater customer engagement results in similar benefits of greater customer loyalty:

check_circleThe customer makes repeat purchases

check_circleThe customer is not swayed by lower price offerings of competitors

check_circleThe customer evangelizes the service she receives

The right Customer Loyalty Program for you

Crafting a loyalty program that works for your brand can be tricky, but it is crucial. An effective loyalty program creates an emotional attachment to your brand, and makes customers feel valued. It will increase engagement, and help you understand who your most valuable customers are; but the first and most important step for increasing customer loyalty is to measure your current standing.

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