Measuring Customer Loyalty: Why and How

What do you know about your loyal customers? Understanding this vital segment of your audience is crucial to driving customer retention and profits: and to gain this, measuring customer loyalty is key.

As a small business, you want to create consistent, positive experiences for your customers that result in repeat business. In fact, developing a strong base of loyal customers can make or break or company.
Download our free retail customer loyalty success guide to learn how to drive customers back 2x more.

Why customer loyalty matters

Simply put, loyal customers repeatedly spend money with your business. This consistent stream of revenue is crucial to the success of every company. Consider these statistics:

  • The cost to bring a new customer up to the buying level of a loyal customer is up to 16x more, according to MarTech.
  • The probability of selling to a loyal customer is 60-70 percent, while the likelihood of selling to a new customer is 5-20 percent, according to Invesp.
  • A 5 percent increase in customer retention can boost profits by 25-95 percent, according to research from Harvard Business School.

The challenges of measuring customer loyalty

Measuring customer loyalty can be tricky. Essentially, you’re trying to measure the strength of the relationship that you have with repeat customers. You won’t be able to do it with one simple formula. Rather, you need to look at a variety of statistics to gain a fuller picture of your relationship with your favorite customers.

3 statistics that help you gauge customer loyalty

There are dozens of statistics that can help brands measure customer loyalty, but for time-strapped businesses, here’s a look at three to start:

  1. Retention rate

This metric tells you the percentage of customers that you keep over a certain period of time. When measuring customer loyalty, your retention rate is crucial as it shows the percentage of customers that come back and shop again and again.

Try this  tool to calculate your retention rate.

  1. Customer lifetime value

How much profit do you stand to make from each customer over their buying lifetime with your company? That number is called customer lifetime value, or CLV. It’s a challenging number for brands to figure out, but it’s an important one if you’re measuring customer loyalty.

Harvard Business has a CLV calculator that you can use to crunch the numbers.

  1. Net promoter score

A net promoter score tells you how likely a customer is to refer you to a friend. It’s a good barometer of customer satisfaction and loyalty. It’s typically a one or two question survey that looks like this:

 

measuring customer loyalty

How do you get a net promoter score? The easiest way is to send customers a survey. If you have customer email addresses, try creating a survey with SurveyMonkey. If you have customer phone numbers, consider texting a survey with a tool like Textline.

Factors that drive customer loyalty

What impacts customer loyalty? Eighty-six percent of customers say likability is the primary driving factor, followed by trust.

To be likable, a brand must show its human side. Consumers don’t want to buy from faceless corporations; they want to buy from brands they can relate to. If you’re transparent about your mission and goals, make your customer service amazing, fix problems quickly, and reward customers who shop at your store, you’re already forming relationships with your customers based on trust. And that will keep your customers coming back to you instead of trying out your competitors.

Many businesses believe price drives customer loyalty. While it is an important factor, research shows 7 out of 10 customers are willing to spend more with companies that offer better service. Price isn’t everything; a great customer experience is often much more compelling.

How a loyalty program can help you measure customer loyalty

The majority of marketers (57%) plan to invest more in loyalty programs in 2017, according to eMarketer. Why? Loyalty programs have a direct impact on customer retention. Eighty-three percent of loyalty program members say that rewards make them more likely to do business with a certain brand.

By setting up a tech-savvy loyalty program, you can not only retain customers through reward but also collect data to help you measure customer loyalty.

You need a program that goes beyond punch cards. To retain customers and measure loyalty, you need the following features:

  • Access to customer behavior data

By implementing a loyalty program that works alongside your point-of-sale system, you can track customer behavior. You can see data points like how much money loyal customers spend, how frequently they come in and what products they gravitate towards.

The loyalty program should provide easy-to-read reports that show business owners vital statistics at a glance.

Often times, business owners are surprised by the data because they’ve made assumptions about their most valued customers for years that data turns on its head. Customers might spend more than you think, tend to buy more during a certain season or spend more on low-ticket items.

Once you have a true assessment of your customer base you have the chance to meet and exceed customer expectations.

  • Ability to segment customers

Your loyalty program should allow you to sort your customers into useful groups by setting certain criteria. For instance, you should be able to define a VIP customer based on customer spend and purchase frequency. By breaking your customers into groups, you can identify their buying behaviors and create promotions that are specific to each. When you do this, your marketing becomes incredibly effective.

  • Ability to create and send promotions

You need the ability to promote your product or service to your customers through your loyalty program. Being able to send your VIP customers a text message when you’re hosting a flash sale, for example, will drive business and increase retention. The ability to schedule promotions ahead of time is a huge bonus.

Wrap up

Measuring customer loyalty can give small businesses insight into their most valued audience segment. The more information you know about your VIP customers, the better your ability is to plan and implement marketing strategies that grow your customer base and raise profits.

Lisa Furgison
About the Author
Lisa Furgison

Lisa is a writer at FiveStars, a freelance journalist, and co-owner of a media company, McEwen's Media.

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