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Customer Loyalty

Measuring Customer Loyalty

N ow you know what customer loyalty is, how to build your own customer loyalty program, what kind of questions you can ask to promote loyalty and even some of the math and psychology behind loyalty in customers. So, how do you measure it? There are a few key metrics to measure customer loyalty that you can use as you move forward on your journey. Some we’ve already talked about, but a few are new introductions to add to your customer loyalty toolkit.

Net Promoter Score

According to Medallia, Net Promoter Score (NPS), is an index ranging from −100 to 100 that measures the willingness of customers to recommend a company’s products or services to others. It is used as a proxy for gauging the customer’s overall satisfaction with a company’s product or service and the customer’s loyalty to the brand.

Customers are sent one single question, with the option to add qualitative feedback at the end as needed. They are asked to rate on an 11-point scale the likelihood of them recommending the brand to a friend or colleague. The question usually looks something like: “On a scale of 0 to 10, how likely are you to recommend [product] to a friend or a colleague?”

As a reminder from the beginning of this guide:

  • Promoters (score 9-10) are loyal enthusiasts who will keep buying and refer others, fueling growth.
  • Passives (score 7-8) are satisfied but unenthusiastic customers who are vulnerable to competitive offerings.
  • Detractors (score 0-6) are unhappy customers who can damage your brand and impede growth through negative word-of-mouth.

To promote loyalty, it can be important to reach out to people who leave qualitative feedback, or those who qualify as detractors (whether they leave feedback or not). After all, as your NPS score is one way to measure your customers’ loyalty, you’ll want to follow up, and track it in order to increase it over time.

Customer Churn and Retention

Customer loyalty has a huge impact on customer churn and retention—a person who is loyal to your company is much more likely to stick around than someone who isn’t. If you aren’t sure how to calculate customer churn, the most basic definition of monthly customer churn rate is the number of customers who churned in the month divided by the total number of customers in the month. As loyalty increases, more customers stick around and your churn percentage decreases.

With retention, it’s the converse. According to Evergage, there are three pieces of information you need to calculate retention:

  1. Number of customers at the end of a period (E)
  2. Number of new customers acquired during that period(N)
  3. Number of customers at the start of that period (S)

Because you are interested in the number of customers remaining at the end of the period without counting the number of new customers acquired, subtract N from E. Then, to calculate the percentage, we divide that number by the total number of customers at the start and multiply by 100. That is the number of customers that you’ve retained! Put more simply:

Customer Retention Rate =
(E − N) / S × 100

Average LTV

Average lifetime value, and knowing what it is for your customers, helps you to have a deeper understanding of what you are gaining or losing by promoting customer loyalty. You can compare your spending on things like customer loyalty programs, and survey conversations for feedback, to the amount of money that you are recouping through your efforts in lifetime value. Because of that, it can be one of the most important metrics for customer loyalty and measuring success.

Hubspot writes:

To calculate customer lifetime value, which predicts the total revenue a business can reasonably expect from a single customer account, you need to calculate average purchase value, and then subtract average purchase frequency rate from that number to determine customer value. Then, once you calculate average customer lifespan, you can multiply that by customer value to determine customer lifetime value.

So, to put it more clearly:

Customer Value =
average purchase value
average purchase frequency rate

Customer Lifetime Value =
customer value −
average customer life span

Referral volume

According to a study done by the Journal of Marketing, referral programs have a lower cost than regular customer acquisition programs, and the difference in customer lifetime value was nearly 25%. Tracking referrals and the volume coming through from them are a great indicator of how loyal your customers are, and where the potential from your incoming revenue from new referrals stands. Similarly, if you have put a Customer Loyalty Program in place, keeping track of referral volume both on a bulk and individual level can be an in-depth way to know what’s working, what’s not working, and who might be trying to game the system.