Customer loyalty is important to businesses. Loyal customers are bigger spenders, with 56% willing to spend more with a company they’re loyal to even when there are cheaper options available elsewhere. They also contribute to your marketing by referring new customers to the business through recommendations.
However, it can be tricky to measure. How do you know if a customer is loyal to your brand? Here are three of the best methods for measuring customer loyalty:
1. Customer retention rate
Often, companies measure whenever a customer makes multiple purchases and use this as an indicator of loyalty. While this can indicate how loyal your customers are, it’s a very flawed metric. A more accurate version is the customer retention rate. To calculate this, you need to work out your 'big window' and 'small window'.
The big window is the amount of time you want the customer retention rate to cover. A year is a good option, but some businesses might want to make this longer or shorter. For example, if you sell large purchases like cars, the vast majority of your customers won’t make multiple purchases in a year.
Then the small window is a shorter period of time. Half of the big window is a good place to start, but revise this to match your business. To calculate the customer retention rate, you need to take the number of customers who made purchases in both windows, and divide that by the number of customers who only made a purchase in the big window. Multiply this by 100 to get a percentage.
For example, if a business had 400 customers who made purchases in both windows and 800 customers who only made a purchase in the big window, your customer retention rate would be 50%. As the name suggests, this is the portion of customers your business is able to retain; a good indication of how many are loyal.
2. Net Promoter Score
The Net Promoter Score (NPS) is a common loyalty metric used by more than two-thirds of Fortune 1,000 companies. While it takes a bit of work to set it up, many businesses see it as an accurate measure of how loyal your customers are. The main thing you need to do is send your customers a survey.
There are only two questions you need for this survey, the first of which is:
The customers who gave an answer between 0 and 6 are your ‘detractors’, answers of 7 and 8 come from ‘passives’, and answers of 9 or 10 come from your ‘promoters’.
To calculate your NPS, subtract the percentage of respondents who were detractors from the percentage who were promoters. So if 60% of respondents were promoters and 30% were detractors, your NPS would be 30. While this tool is simple and effective in measuring customer loyalty, the Wall Street Journal points out it won’t tell you everything you need to know.
That’s why many companies ask the second question: “Why did you give the answer you gave?” It lets you dig a little deeper into the data and uncover why your customers are loyal or disloyal, which can help you spot recurring issues.
3. Customer lifetime value
This is a very money-based metric, but it works well as an indicator of customer loyalty. It works out how much each customer spends with you over their lifetime. To measure your customer lifetime value, you'll need to calculate a few things beforehand; namely the average price of a purchase, and the average number of purchases your customers make.
Once you have these metrics, all you have to do is multiply them together. For example, if your average purchase value is $100 and each customer makes an average of 6 purchases with you, your customer lifetime value is $600.
As a rule, this metric will only grow in three situations:
- If you raise your prices (something you can account for)
- If customers start spending more
- If you gain more repeat customers
This makes it a great metric to see how your customer loyalty is changing over time.