Customer Loyalty: What Is It and How to Calculate It

Date: 2020-12-07 | Time of reading: 7 minutes (1281 words)

Customer loyalty.jpg

One of the most important indicators in business is customer loyalty. A company that has a lot of loyal customers spends less money on advertising and, at the same time, gets a high income. To make customers more loyal, it is necessary to regularly examine their relationships with the brand. In this article, we will tell you in detail about customer loyalty: why it is so important, how to retain and measure it.

What is customer loyalty and why do we need it

Customers’ positive attitude towards a brand, company, or business is considered loyalty. The more loyal customers you have, the higher your profit and the trust of other buyers will be. But these are not the only reasons why customer loyalty is so important.

First, customers who love your products will come back again and again.

Second, they will recommend you to their friends and acquaintances, thus attracting new customers.

Third, regular customers will not spend time searching for alternative products.

Fourth, these customers almost do not respond to competitors ' advertising campaigns, because their needs are met.

Fifth, they are more likely to leave positive reviews and feedbacks that have a positive impact on business development.

Sometimes people confuse brand loyalty and customer loyalty. Here's brand loyalty definition. It is the commitment of consumers to one brand and the willingness to buy only its products, regardless of comfort and price. Customer loyalty is the desire of customers to buy and interact with a brand over and over again. Compared to customer loyalty, brand loyalty is more about emotional connections and an attachment to your brand.

Why is it so important to increase customer loyalty and retain loyal customers

Customer loyalty retention means that you are able to maintain good relationships with existing customers and to sell your products to them regularly. Let's look at the statistics to understand why you need to keep loyal customers. Business.com provides the following examples:

  • If you increase the customer retention rate by 10%, the value of the company can be increased by 30%;
  • A regular customer spends (on average) up to 67% more money than a new one;
  • Increasing customer retention can increase profit by 25-95%.

This data clearly demonstrates that it's really worth paying attention to customer loyalty.

Customer loyalty is tracked in several ways.

What metrics are needed to measure customer loyalty

1. Customer Retention Rate (CRR)

This parameter shows what percentage of buyers remained loyal to you over a specific period of time. If the retention rate is low, then you have few loyal customers and vice versa.

To calculate CRR you need three reference points: the number of clients at the beginning of the period measured (CS), the number of clients at the end of the period measured (CE) and the number of new clients during a given period (CN).

CRRFormula for calculating CRR

We offer 5 techniques to increase CRR:

1. Take a realistic look at your capabilities. If you promised your clients something and didn't fulfil it, they are unlikely to come back to you.

2. Play ahead of the curve. By analyzing you can predict your customers' needs and offer them the right products or services on time. This way, customers will feel the attention and care from you.

3. Set key performance indicators for your team and track them. This way you can improve your customer service.

4. Make use of social networks. Interact with customers in social networks: keep a close watch on comments, read reviews. All this will help build trust with customers and increase loyalty.

5. Conduct interviews. This information will highlight problems in working with customers, as well as a quick solution to keep customers for a long time.

According to Gartner, the increase in customer loyalty is influenced by increasing product value. 82% will remain loyal to the brand if the usefulness of goods and services increases.

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2. Customer churn rate (Churn Rate - CR)

With this metric, you can calculate the number of clients lost in a certain period of time. If CR is low, it indicates high customer loyalty. If it is high, you should be more serious about customer retention.

CRFormula for calculating CR

3. Lifetime Value indicator (LTV)

This metric shows how much money a consumer spends in your store during their life cycle. When a customer is loyal, he makes you a good profit, increasing LTV. To calculate LTV, you need to multiply the amount of money that a customer spends on average a year in your store by how long they actually stay active.

By this indicator, you control whether the cost of attracting customers does not exceed your income.

LTVFormula for calculating LTV

4. Repeat Purchase Rate (RPR)

Each of us strives to ensure that the customer returns to us again and again after making a purchase. The effective metric for assessing customer loyalty is the Repeat Purchase Rate (RPR).

To calculate this indicator, you need to divide the number of customers who have made several purchases over a certain period of time by the total number of customers for the same period.

RPRFormula for calculating RPR

5. Upselling and cross-selling

Loyal customers are more likely to buy additional products that are offered to the already selected one. And if a customer looks into your store, buys the expected product, and then also buys products from a completely different category — this buyer is definitely loyal to your company. Upselling and cross-selling are usually combined to maximize revenue.

To determine the upselling indicator, you need to divide the number of customers who bought additional products by the number of customers who bought a single product.

6. Net Promoter Score (NPS)

To know NPS a single question should be asked: How likely is it that you would recommend our brand or product to your friends, relatives or colleagues? The scoring for this answer is often based on a 0 to 10 scale. Buyers who answer 9 or 10 are considered «promoters»; those who mention 7 or 8 are «passives»; and those who respond with a score less than 7 are considered «detractors». This survey is a very useful indicator in evaluating loyalty, as a loyal customer is more likely to recommend you to your loved ones.

NPSFormula for calculating NPS

What Altcraft Marketing offers

With the help of Altcraft Marketing platform you will be able to implement any client loyalty program scenarios: generate promo codes according to a specified format, assign points, arrange email quizzes, and more.

Our team has added to the platform a special data collection service - the Forms. Using the Forms you can design a survey or quiz, send it to your clients, and find out how loyal your audience is.

Altcraft Marketing will also automatically calculate lifetime value if necessary. LTV is determined by the results of all client activities.

LTV-Altcraft-MarketingLTV calculation in Altcraft Marketing platform

Summary

Here are six metrics for measuring customer loyalty:

  1. Customer Retention Rate (CRR).
  2. Customer churn rate (CR)
  3. Lifetime Value indicator (LTV)
  4. Repeat Purchase Rate (RPR)
  5. Upselling
  6. Net Promoter Score (NPS)

If you have determined during the calculation that your performance is high, do not relax. You should constantly support loyal customers: give gifts, attract them with promotions and discounts, and offer reward and loyalty programs. Using these metrics, it will be easier to retain existing customers and turn new customers into regular customers.

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Author: Lyudmila Kovalenko

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