Do you remember punch cards? They were often a staple of sandwich shops and ice cream parlors. After so many visits, you would be the lucky recipient of a free item. What a thrill it was to present your fully punched card, then immediately start on the next. Simpler times, right? Measuring customer loyalty these days is a little more complex. Long gone are the days of punch cards. They’ve been replaced by apps and points and surveys. However, as competition in almost every industry has increased dramatically, loyal customers may be more important than ever.
According to HubSpot, customer loyalty is “a customer’s willingness to repeatedly return to a company to conduct some type of business due to the delightful and remarkable experiences they’ve had with that brand.”
Though we often share anecdotal evidence of customer loyalty, having hard numbers to back up those claims are less common. With that in mind, in this article, we cover why customer loyalty is important, along with a few metrics you can track to better understand your customer’s loyalty.
Why is customer loyalty important?
In order to run a successful business, you need customers. Plain and simple. Though attracting new customers is important, keeping current ones is just as, if not more, important for a few key reasons. First, it costs a lot less to keep a customer than to attract a new one.
Second, long term customers are actually more likely to spend more money with your business than a new customer. It makes sense. If they’re happy with one product you make, chances are good that they’ll be happy with another.
Last, loyal customers are more likely to refer you to others. Whether that be to peers, family, or friends, word-of-mouth marketing is unmatched in its effectiveness. In fact, word of mouth marketing drives nearly 6 trillion dollars worth of annual spending and results in 5x more sales when compared to a paid impression.
Knowing the importance of customer loyalty is great, but the real trick is measuring customer loyalty so you can better optimize for it in the future.
Measuring customer loyalty with metrics
There are a number of different ways you can measure customer loyalty. Commonly, businesses may use something like an NPS survey. Though useful, it only tells part of the story. To have a more well-rounded view of your customers’ loyalty, it may be a good idea to check out a few other metrics.
Customer Lifetime Value
Though on the surface customer lifetime value (CLTV) may not seem like an indicator of loyalty, it’s one of the most direct ways to see if your customers are spending more money with you over time. CLTV really only grows one of two ways. Either you increase your pricing, or your customers stay longer.
So, assuming your pricing hasn’t changed, if you see an increase in CLTV then you know customers are staying longer and purchasing more, thus they are more loyal to your brand.
To measure CLTV, calculate your average purchase price, and then multiply that by your average purchase frequency. That gives you your average customer value.
From there, you can multiply that number by the average customer lifespan to get the CLTV.
Renewal ratio is often cited as a way to determine how strong your product-market fit is. The conventional wisdom is that if your product is serving customers’ needs, they’ll renew. The same logic can be applied for customer loyalty
When customers are loyal, they stick with you. So, if you see your renewal rates increasing, then it could be a signal that loyalty is increasing, too.
Calculating renewal ratio, or repurchase rate as it’s also known, varies depending on the type of business you have. For subscription-based companies, it’s relatively simple. All you need to do is divide the number of customers who extend at the end of their first contract, by those who cancel.
If you have a transaction-based business, then you’ll need to first calculate your average time between first and second purchases, and it’s standard variation. From there, you’ll be best served by adding two times the standard variation to the average time. Last, divide that number by the number of non-repeat buyers.
Upselling ratio is a relatively straightforward metric. Basically, it’s a measure of how many customers are increasing their total spend with you. The reason it’s a strong indicator of loyalty is that loyal customers are more likely to purchase other products from you.
Think about Apple as an example. How many people do you know that first got introduced to their products through an iPod or iPhone? Then, maybe they purchased an iPad, or Macbook. It’s not an uncommon story. In fact, 87% of Apple’s customers are brand loyal.
The best way to increase your upselling ratio is to make good products that work. According to research, 55% of consumers said product quality was the dominant factor in brand loyalty.
Customer loyalty index
If you’ve ever purchased stocks, you may be familiar with the idea of an index. An index fund is a compilation of lots of stocks. The benefit is that having input from different sources makes it a more reliable bet. The same is true with your metrics.
When you combine multiple metrics, you control for volatility. To create a customer loyalty index combine NPS, repurchasing, and upselling into one metric. Send out a survey asking how likely the respondent is to 1. Refer your friends, 2. Repurchase form you in the future, and 3. Try out other products of yours.
For each question, you use a standardized scale to measure from “not likely” to “very likely.” To follow convention, you could use 1-10 as NPS surveys do. You could also use your own scale if you prefer.
Your customer loyalty index (CLI) is an average of all those scores. Asking customers their intentions directly isn’t always the most accurate way to measure, as what people say they’ll do and what they actually do can vary quite a lot. That said, if you send out the survey regularly, over time you should be able to get a pretty reliable measure.
Though the days of punch cards may be long gone, customer loyalty is as important as ever. With growing competition, and an ever-changing business landscape your ability to measure customer loyalty is important, too.
Collecting anecdotal evidence can be great for testimonials and other company collateral, but the best way to get a true pulse is by utilizing metrics. There are the usual suspects like NPS and CSAT, but they only tell part of the story.
Consider looking into a few other metrics like customer lifetime value, renewal ratio, and upselling ratio. Once you have those nailed down, you can bring them together and make your own customer loyalty index.
When you better understand your customers, you’ll be better able to serve them. When you’re able to better serve them, the more likely they’ll stick around for the long-haul. No punch card needed.