The most valuable customers are those who keep coming back, showing their loyalty to your brand. These loyal customers will not only keep returning for repeat purchases, but they'll also recommend your brand to others as brand ambassadors. Despite the importance of having loyal customers, you might not know exactly how to measure it. Having this information can help you determine how effective your brand is when it comes to retaining customers in the long term. To give you a better idea of where you stand with your customers, here we'll dive into some metrics to measure customer loyalty.
Definition of customer loyalty
Customer loyalty is a measure of a customer's willingness to repeatedly do business with a brand or company over time.
It refers to the degree to which a customer is committed to a particular product or service and is willing to make repeat purchases and recommend the brand to others.
A loyal customer is one who continues to do business with a company despite the availability of other options and may even become an advocate for the brand. Building and maintaining customer loyalty is crucial for the long-term success and growth of a business.
Sephora’s customer loyalty example
One of the most prominent brands gaining and maintaining loyalty among its customers is Sephora. The French personal care and beauty retailer offers its customers access to one of the leading customer loyalty programs. This program demonstrates a deep understanding of what Sephora's customers want.
Through Sephora's loyalty program, customers can test full-face makeovers and many other types of offerings that Sephora or its many retailers develop. In addition, loyalty program members have access to Sephora's brand community. It has helped boost loyalty through a shared subculture among its customers. This Beauty Insider Community allows customers to request and share tips in the personal care and beauty space.
These and other advantages make Sephora a continuing success story as it builds on its loyalty program and offerings.
Importance of measuring customer loyalty
Measuring customer loyalty is important because it helps businesses to understand how satisfied their customers are, and how likely they are to continue buying from them in the future.
Understanding the factors that contribute to customer loyalty can help a business improve its customer retention rates and increase revenue.
You must have loyal customers that indicate high customer retention, as this will help maximize profitability. Keep in mind that it costs much more to acquire new customers than to retain them. Recent stats have found that boosting retention by a mere 5% can increase profits by 25% or more.
Based on the data you collect when measuring customer loyalty, you can make any necessary adjustments to your marketing efforts. For example, you could determine that certain rewards in your loyalty program are more likely to foster loyalty than others, leading you to change your offerings accordingly. You'll also be able to set specific goals around customer loyalty. Measuring your efforts can determine whether you're meeting those goals.
Ultimately, using the right metrics to measure customer loyalty, you'll discover the best ways to maximize loyalty and ensure more people don't turn to competitors over your brand. The key is to know what to track and how to track it as you seek to measure loyalty.
Top 11 Metrics to Measure Customer Loyalty
There are multiple metrics to measure customer loyalty that you can track. They would depend on the goals you have set and what you specifically need to measure.
The following is a breakdown of these metrics and how they can help you track your most loyal customers:
- Customer Retention Rate
- Customer Lifetime Value (CLV)
- Repeat Purchase Rate (RPR)
- Upsell Ratio
- Net Promoter Score (NPS)
- Customer Loyalty Index (CLI)
- Customer Effort Score (CES)
- Active Engagement Rate
- Participation Rate
- Churn Rate
- Customer Satisfaction Score (CSAT)
1) Customer Retention Rate
The customer retention rate is the rate at which your current customers stay with you over a set period. Using this metric, you can determine what's keeping customers loyal to your brand over others or what's keeping them from staying with you.
You can calculate the customer retention rate using the following formula:
(Customers you have after a length of time) - (New customers)/(Customers you began with) x 100
For instance, you might find you have a total of 200 customers at the beginning of six months. During this period, you may have lost five customers while gaining 50. This would give you 245 customers by the end of those six months. Using the formula, you'd find that you have a retention rate of 97.5%, which is exceptional.
The only potential issue with focusing on building customer retention is that you might not devote enough time to customer acquisition strategies, so ensure you balance both.
2) Customer Lifetime Value (CLV)
Customer lifetime value (CLV), also known as simply lifetime value (LTV), indicates how much income you stand to earn from your customers over their entire relationship with your brand. You can use this particular metric to identify the most valuable customer segments and anticipate the amount of money customers are likely to spend on your offerings.
The formula for CLV is as follows:
(Customer value) x (Average customer lifespan)
You can boost CLV by developing personalized marketing efforts that bring real value to your customers and continue to engage them. For example, you might use personalized in-app messaging to communicate product recommendations or offers. On the other hand, emails continue connecting with customers off-site. You can also increase this metric by encouraging customers to make larger purchases through upsells and bundled orders.
3) Repeat Purchase Rate (RPR)
The repeat purchase rate (RPR) is the rate at which customers buy specific products multiple times. If you have a high RRR, this shows you have some loyal customers who regularly come to you for more of the same high-quality offerings. Not only will people making repeat orders keep returning for the same items, but they'll also be more open to trying new offerings. This is why you should target customers with a high RRR when launching new products or services.
The formula for RRR is:
(Number of repeat customers) / (Number of paying customers)
4) Upsell Ratio
Upsell ratio measures the ratio of customers who have purchased several types of products as opposed to a single product. Specifically, you'll want to have a high upsell ratio of customers who've bought high-value items to maximize their cart value. You can also achieve a high upsell ratio by cross-selling several products of the same or similar value.
You can easily calculate your upsell ratio of customers with the following formula:
(Number of customers who buy additional offerings on top of their initial order) / (Total number of customers)
If you notice your upsell ratio is low, you can try launching more upsell and cross-selling campaigns. However, you should avoid getting too aggressive with these efforts. Otherwise, you may wind up turning customers away from purchases entirely.
5) Net Promoter Score (NPS)
Net Promoter Score (NPS) is a metric used to measure customer satisfaction and loyalty.
It is based on the simple question: "How likely are you to recommend our product/service to a friend or colleague?" Respondents are asked to rate their likelihood on a scale from 0-10, with 0 being "not at all likely" and 10 being "extremely likely."
To calculate NPS, use the following formula:
(Percentage of promoters [those who rate you favorably]) - (Percentage of detractors [those who rate you unfavorably])
6) Customer Loyalty Index (CLI)
The customer loyalty index can help you keep track of any changes in customer loyalty over a certain period. Like NPS, you can gather data for this metric through customer surveys. For instance, you can ask customers how likely they are to recommend your brand to someone, try new offerings from your brand, and buy from your business again.
With CLI, customers will respond to questions on a scale of one to six in most cases, with one indicating that customers are very likely to recommend your brand, make repeat orders, and try new products and services.
You would calculate CLI by collecting the answers to all three questions and calculating the average score.
7) Customer Effort Score (CES)
Yet another score you can collect is the customer effort score (CES). It gauges how much effort a customer has to spend to buy products, resolve issues, have questions answered, and have requests fulfilled.
Like NPS or CLI, you would calculate this score based on answers in a survey. This particular survey would ask people "How easy was it to interact with [your company] on a scale of 'very easy' to 'very difficult?'. If customers answer "very easy," they're far more likely to be loyal to you and continue engaging with your brand and offerings.
While CES is a great way to measure ease of interaction with your brand, it's not always helpful in measuring customer loyalty on its own. Instead, combine it with NPS and CLI to get a complete picture of the customer experience.
8) Active Engagement Rate
The engagement rate, or active engagement rate, takes into account all people who actively engage with a loyalty program. Based on this calculation, you can determine how successful your loyalty program is and figure out ways to encourage more people to sign up. For instance, you might find that you need to advertise the rewards in your program, personalize rewards when possible, or make it easier for customers to earn those rewards before losing interest.
You can calculate the engagement rate using this formula:
(Number of engaged customers) / (Total number of customers)
9) Participation Rate
In addition to the engagement rate, the participation rate will help you gauge the success of your loyalty program. While the engagement rate is ideal for tracking people who are already signed up for your loyalty program, the participation rate will help determine how many people are enrolling. As such, this metric is a good indicator of how well your loyalty program is attracting customers. If this metric is low, you might discover that you need to promote your loyalty program to more customers or find ways to revamp your rewards. People might also simply not know how to enroll. In this case, you can direct people toward a signup page to get them started.
Calculating the participation rate is easy and entails the following formula:
(Number of members in your loyalty program) / (Total number of customers)
10) Churn Rate
While the above metrics should be as high as possible, this is the metric you'll want to minimize. The churn rate measures how many people are turning away from your brand. If you have a high churn rate, it means something is causing people to drop off as customers. Whether it's low-quality offerings, poor customer service, a general lack of engagement, or successful competitors.
Your churn rate should be consistently low, staying no higher than 5% - 7%. If you notice this metric is increasing, you'll need to investigate what's causing people to leave your brand behind. Consider looking for ways to ensure customers remain loyal to you and won't turn to your competitors.
Want to calculate your churn rate? Use this formula:
(Churned customers) / (Total number of customers) x 100
11) Customer Satisfaction Score (CSAT)
One final metric to help measure customer loyalty is the customer satisfaction score (CSAT). It measures just how happy people are with your offerings, customer support, and overall experience with your brand. It complements other similar scores like CES and CLI and can indicate whether you're offering customers a truly satisfying experience.
Typically, you would calculate CSAT by asking customers how satisfied they are with a particular experience on a scale of one to five, with one being "very dissatisfied" and five being "very satisfied". You can then take the average of all scores gathered from customers to give you the CSAT.
Using this metric, you can identify specific pain points you need to address, improve the customer experience, exceed customer expectations, and learn more about what people want so you can give it to them.
Conclusion
With the help of all these metrics to measure customer loyalty, you can figure out how your brand is doing when it comes to attracting loyal customers. You can then use tools such as Storyly to engage customers and keep them loyal to your business as long-term customers.
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