Customer loyalty is at the heart of every thriving business. While customers will inevitably come and go, maintaining a base of loyal customers that have an emotional connection to your brand will allow your business to prosper.
- What Is Customer Loyalty?
- Why Is Customer Loyalty Important?
- How Do You Measure Customer Loyalty?
- How to Keep Customers Loyal
- Types of Customer Loyalty Programs
What Is Customer Loyalty?
Loyal customers are happy customers — they have a positive experience with your company and are more likely to repeatedly do business with you rather than any of your competitors. Customer loyalty is essential to a company’s success, as loyal customers interact with your brand more, spend more, and are easier to sell to.
Your business’ bottom line is directly tied to customer loyalty. Loyal customers drive sales and even help you gain new customers organically. If you want to increase profits, you need to ensure that the customer experience is a positive one — positive enough to keep them coming back.
Are there different types of loyal customers?
Loyal customers can manifest in different ways. You have customers that stay loyal for low prices, freebies, or simply convenience. Others haven’t experienced anything negative that would drive them away. Lastly, you have customers that are truly loyal, and won’t be easily swayed to purchase from a competitor.
- Happy Customer. Some customers are content using your product or services — they have no complaints and purchase from you regularly. However, these types of customers can easily be stolen away if a competitor has more enticing deals or discounts. Happy customers respond to a simple, easy buying experience that is both a good deal to them and convenient.
- Loyal to Price. These customers are loyal to low prices — they’re with you now because you have the best deal, but they could just as easily leave if they find that elsewhere. Loyal to price customers respond to good deals, and you can retain them by offering low costs or discounts that encourage them to stay and continue spending.
- Loyal to Convenience. Your company is the most convenient to use for these customers, and they are willing to pay more if that means they can continue benefiting from your location, speediness, or ease of communication. Loyal to convenience customers are very valuable and will continue to spend money as long as you don’t inconvenience them in any way.
- Loyal to Freebies. Some customers only make purchases because of the free things you offer. They don’t spend consistently and are only loyal to your freebies. Loyal to freebies customers respond to perks such as buy 1 get 1 free deals and usually only make purchases when these freebies are involved.
- Truly Loyal. Certain customers are your biggest advocates and are loyal to your brand. It’s highly unlikely they would ever take their business somewhere else, and showcase their loyalty by leaving positive reviews, participating in loyalty programs, and referring others to your business. Truly loyal customers spend money consistently and don’t need extra incentives to do business with you.
Why Is Customer Loyalty Important?
It’s easier to keep a customer rather than acquire a new one, which is why customer loyalty and customer retention are important aspects for your business to focus on. Harvard Business Review conducted a study revealing that if you build customer loyalty by only 5%, it can increase profits by 25%-90%. Loyal customers shop regularly and are more likely to make future purchases.
It’s not just about the profits, though — loyal customers offer other key benefits that help your company thrive. When customers are happy with their experience, they’re likely to refer friends and family. 13% of all global sales are the direct result of word-of-mouth marketing, which is what loyal customers often do for free.
If you want to beat out competitors, customer loyalty is key. When competing businesses start offering lower prices or freebies, you don’t want to worry about your customers jumping ship.
Sometimes it’s better to look inward than to look outward, and focusing on your share-of-wallet versus your market share is one way to do just that. Customer loyalty helps boost your share-of-wallet because loyal customers are more likely to regularly spend money at your business rather than a competitor’s.
Figure out your share-of-wallet by looking at how much money the average consumer spends on products/services in your industry. Then, look at your internal data to see how much your average consumers are spending at your business.
You can use this information to reward loyal customers who are spending more at your company. This is an important metric to be aware of so you understand how your consumer base compares to the average in your industry.
Better Word-of-Mouth Referrals
The importance of word-of-mouth referrals cannot be overstated. It’s one of the most effective methods of marketing — and it's free. Satisfied customers who have an emotional connection to your brand will refer you to friends, family, and colleagues. They’re also more likely to speak positively about you on social media, which can passively generate more leads and more customers.
Though not impossible, it’s difficult to measure word-of-mouth referrals. You can ask new customers how they heard about your product or if anyone recommended them. However, this won’t capture all of your word-of-mouth referrals, which is why referral programs are a great way to increase the number of referrals and more accurately track them.
Customer retention can be more important than customer acquisition simply because repeat customers contribute more to a business's long-term success. They are easier to sell to, are more likely to promote your business, and spend more money. All of these result in higher profits for you.
Not only does customer loyalty result in higher profits due to the inherent marketing that comes with it, these customers are proven to spend more money. Returning customers spend 67% more than new customers. These customers have buying habits that reflect they are more likely to buy a more expensive product or service because they trust you more than a new customer.
How Do You Measure Customer Loyalty?
Now that we’ve determined customer loyalty is essential to your company’s success, it’s time to figure out a good way to measure that metric. Loyalty is essentially an emotion, and it can be hard to define how loyal your consumer base is even with extensive customer data.
It’s important to know how loyal your customers are so you can see what strategies are working, which aren’t, and how you can continue to build customer loyalty.
There are 6 metrics you can look at to best track customer loyalty and determine what areas need improving.
Net Promoter Score (NPS)
Net Promoter Score (NPS) predicts your business growth and measures customer experience with one simple survey question: “How likely is it that you would recommend [brand name] to a friend or colleague?” Customers give a score on a scale from 0-10.
The NPS has become a core metric for marketing teams because it’s easy to understand and doesn’t ask a lot from the customer — unlike traditional marketing surveys. Participants are grouped into 3 categories based on their response score: Promoters (9-10), Passives (7-8), and Detractors (0-6).
To calculate your NPS, subtract the percentage of Detractors from the percentage of Promoters. Promoters are your most loyal customers, and you should make sure you show them your appreciation through loyalty programs to keep them happy.
Since the NPS only illustrates “intent,” it might not be a good enough metric to look at all on its own. Even if a customer responds to the survey with a 10, they might not actually refer people to your brand. Pair the NPS with other metrics to get an even better understanding of your customer loyalty.
Customer Loyalty Index (CLI)
Similar to NPS, Customer Loyalty Index (CLI) is a standardized metric that uses customer feedback to gauge loyalty. You ask customers 3 questions and have them respond on a scale from 1-6, with 1 meaning very likely and 6 meaning not likely.
- How likely are you to recommend [brand name] to a friend?
- How likely are you to buy from [brand name] again?
- How likely are you to try [brand name]’s other products or services?
It expands on the single question asked in the NPS survey to encompass repeat and multiple purchases. Average the 3 scores to calculate your CLI, and keep in mind that again, this measures future intent rather than actionable behavior.
You should send this survey out regularly to effectively monitor the reality behind these responses. Take a look at the demographics behind the survey participants to get a better look at what the makeup of your loyal customer base looks like. Use this information to appeal to a wider audience and continue targeting the target audience.
Loyal customers are more likely to recommend your company, buy from you again, and try out your other products and services. If you have a large loyal customer base, then your CLI should be higher than a company that does not focus on building customer loyalty.
Customer Lifetime Value (CLV)
Customer Lifetime Value (CLV) measures how much revenue you earn from a customer during the span of your relationship. It’s another important metric to track because of its direct correlation to revenue and provides you with key information to maintain profit margins.
Before calculating the CLV, you need to figure out how much the average customer spends per visit (average purchase value) and how often they make purchases each year (average purchase frequency rate). Now that you have your average customer value, multiply it by your average customer lifespan and you’ll get your average CLV.
The higher the customer lifespan, the higher your customer retention is. CLV is an essential metric when you’re focused on continual rather than short-term sales — and customer loyalty is all about longevity.
When existing customers act as Advocates and spread the word about your business, you can count on their referred Friends to be valuable customers. Friends have a 5x faster conversion rate and their lifetime values are 3-4x higher than other customers. If your CLV is lower than you’d like, one way to combat this is to focus on loyalty programs and try to improve your customer loyalty.
Repeat Purchase Rate
Aptly named, the repeat purchase rate measures what percentage of your customers come back to make additional purchases. In other words, the ratio of your repeat customers to your one-time customers.
You can determine this rate by dividing the number of customers that have made more than one purchase by your total number of customers. Multiply that by 100 and you have your number in percentage form. If you have 412 repeat customers and 900 total customers, your repeat purchase rate would be 46%.
Maximizing profit on every customer you’ve acquired is key, and customers who make repeat purchases will result in a better ROI. This is where loyalty and rewarding loyal customers come back into play — referral or loyalty programs will reward customers and encourage them to make more purchases.
A higher repeat purchase rate is indicative of loyal customers, since referred Friends are more likely to become repeat buyers.
Customer Churn Rate (CCR)
When a customer stops being a customer for your company, that is called customer churn. Customer churn rate (CCR) measures the loss of customers during a specified time period.
Calculate CCR by using the formula that churn rate = (lost customers / total number of customers during specified time period) x 100. If you began the month with 300 customers and lost 10, then your CCR would be 3.33%.
It’s unrealistic to expect a CCR of 0% — customers will always leave over time. What’s important is to ensure your CCR is low and not increasing over time. A lower CCR will indicate a higher number of loyal, existing customers.
It costs 5x more to attract a new customer than to retain an existing one, which means you’ll want to keep your CCR as low as possible in order to maximize your profitability and ROI.
Engagement with your brand
Strong customer relationships and a high level of customer satisfaction should come in the form of positive engagement. While customers who have no attachment to your brand will make their purchases and move on, customers who are brand loyal will be interacting with you more than just adding items to their cart.
You can measure engagement with your brand in a number of ways — how many likes or comments you get on social media, how much web traffic you’re generating according to Google Analytics, or how many email subscribers you have. Seeing who interacts with your brand in several ways is one way to identify committed customers.
Improve your customer engagement by showing your customers that you actually care about what they have to say. Reward them for leaving positive reviews, or implement changes when you receive an overwhelming amount of feedback.
How to Keep Customers Loyal
Customer loyalty enables businesses to grow in different directions, try out new products or services, and be more experimental. Have a great customer loyalty strategy in place to make sure you’re keeping your committed customers satisfied, and turning neutral customers into loyal ones.
Be as generous as your customers
Make sure that the rewards you’re offering customers are actually valuable, and don’t seem like a scheme to just acquire more money. Since existing customers are generously helping your business grow, you should in turn be generous to your customers. Your business will benefit from building a larger loyal customer base, even if you give away valuable perks.
- Send specific discounts and freebies that you know certain customers will appreciate
- Set a relatively small spending limit before customers are rewarded
- Offer truly valuable rewards, not small discounts
Show your gratitude
If you want to build customer loyalty, you need to make existing customers feel appreciated. Personalize your communications so that customers feel special and have a more positive experience with your company. It will take more time than sending out mass-messaging, but you’ll stand out from competitors who go that route.
- Send personalized “thank you” notes in confirmation emails
- Include handwritten notes in packages
- Offer special discounts for birthdays or holidays
Provide benefits to your customers with every purchase
Remind your customers why they choose to do business with you every time they make a purchase. This can come in the form of a loyalty program where each purchase adds up to special rewards, or by simply adding on special offers after a customer has successfully made a purchase.
- Create a loyalty program so that the customer earns something each time they make a purchase
- Offer unique discounts or freebies when customers make purchases
Build a useful community for your customers
Memorable and great customer service can increase customer loyalty and customer satisfaction. But don’t stop there, create a space where customers can interact with one another to build levels of trust and brand loyalty. You’ll have to monitor these spaces, but public forums can give you ideas for a new product or service as well as help you understand what your customers like/dislike about your brand.
- Add a monitored community forum where customers can speak freely
- Listen to the positive and negative feedback and implement changes accordingly
Types of Customer Loyalty Programs
A customer loyalty program is a sure-fire way to boost customer loyalty, retain existing customers, while increasing profits, engagement, and CLV. Friendbuy can help your marketing team define your goals and get you started with the best fitting loyalty program for your company.
We’ll help you figure out which actions are most important to your business and then build a loyalty program that rewards customers for taking those same actions. You’ll work towards your goals while simultaneously providing a better experience for your loyal customers.
There are several different types of customer loyalty programs, and each is constructed to help you achieve certain goals. From point-based loyalty programs that allow customers to collect points and receive discounts to exclusive VIP loyalty programs, there’s something for every company.
- Point-Based Loyalty Program. A point-based customer loyalty program lets customers rack up points by completing certain actions. Making purchases, referring friends, signing up for a newsletter, or downloading an app all reward customers with points that can later be redeemed for discounts. Businesses who want to focus on growing other aspects of their company — not just generating purchases and new customers — can encourage this through a point-base program.
- Tiered Loyalty Program. If you want to encourage customers to make multiple purchases, then a tiered customer loyalty program might be the way to go. Every time a customer spends a certain amount, they will unlock a new tier that will provide them access to additional benefits and perks. This is beneficial to your business because you’re encouraging customer engagement and offering them incentives to continuously choose your brand again and again.
- Paid (VIP) Loyalty Program. Kick your customer loyalty programs up a notch by offering a paid, or VIP, customer loyalty program. Customers will pay additional money to have access to exclusive benefits — early access, special events, limited-edition products, etc. This kind of program poses a risk to your business if it’s too expensive, but if your other customer loyalty programs are booming, then it may be worth considering.
- Value-Based Loyalty Program. It’s possible to cultivate a positive relationship with your customers, without giving anything away for free, by showing that you care. With a value-based customer loyalty program, you allow customers to donate to causes that align with your brand’s values. Structured similarly to a points-based program, customers have the option to donate money to a cause every time they earn a certain amount of points, rather than applying that money toward a discount. It’s a great way to build a relationship with your customers, showcase your values, and stand out from the crowd.
- Game-Based Loyalty Program. Incorporate gamification into your customer loyalty programs and entertain your customers while simultaneously strengthening your brand’s image. You can use gamification to reward customers who complete set challenges, share on social media, take surveys, or score high on a leaderboard. This is a more complex program — which can reap great benefits — but should only be implemented because your customers are very engaged.