How to measure customer loyalty
Here are a few metrics for you to measure customer loyalty
Customer loyalty may seem like an abstract concept, linked to the world of psychology. However, companies need to measure it to see if their product/service, customer service, or marketing decisions are working.
Customer loyalty and customer retention
Customer loyalty is the probability that a customer will continue to purchase from your company over time.
It depends on various factors, such as:
- How well the product/service meets their needs,
- How easy they are to use,
- The quality of customer service,
- How often you offer promotions, discounts, free trials, and other perks,
- The way your company communicates with the customers,
- Brand transparency, brand values, company's commitment to environmental or social issues,
- The overall quality of customer experience.
High customer loyalty leads to customer retention, that is, the number of customers who stay with your company over time. A high customer retention rate is good for you because it means that you need fewer resources to find new customers.
How to measure customer loyalty: the metrics you need to check
There are different metrics that you can monitor to measure customer loyalty. Here are a few of them.
Repeat Purchase Rate (RPR)
Repeat Purchase Rate is the percentage of customers who buy from your company more than once. It's important because it shows how many customers are returning to make another purchase.
To calculate Repeat Purchase Rate, you need to know the number of customers who made a purchase in the past and the number of those customers who made another purchase. Then, divide this number by the number of customers who made a purchase in the past and multiply by 100 to get the percentage.
A high Repeat Purchase Rate means that customers are happy with their purchases and are likely to buy again.
Customer Lifetime Value (CLV)
Customer Lifetime Value is the total amount of money that a customer will spend with your company throughout your mutual relationship.
You should measure it because it shows how much revenue your company can generate from a customer.
To calculate Customer Lifetime Value, you need to know how much each customer spends per year and, most of all, how many years the customer will continue spending. Of course, the better your customer loyalty, the better the Customer Lifetime Value.
Customer Acquisition Cost (CAC)
Customer Acquisition Cost is the amount of money that your company spends to acquire a new customer.
A high CAC means that you are spending too much to acquire new customers. The reason? Probably, a poor customer loyalty: since those who have already bought once no longer do so, you are forced to invest in the continuous search for new ones.
To calculate Customer Acquisition Cost, you need to know how much you're spending on marketing and advertising divided by the number of new customers.
Customer Churn Rate (CCR)
Customer Churn Rate is the percentage of customers who stop buying from your company over a given period of time.
To calculate Customer Churn Rate, you need to know the number of customers at the beginning of the period and the number of customers at the end of the period. You calculate Customer Churn Rate by subtracting the number of customers at the end of the period from the number of customers at the beginning. Then, divide that number by the number of customers at the beginning of the period, and multiply the result by 100 you get the percentage.
Since CCR shows how many customers are leaving, it gives an idea about the weakness of your customer retention and customer loyalty.
Gross Margin Per Customer
Gross Margin per Customer is the difference between the revenue that your company makes from a customer and the cost of goods sold to that customer.
It is useful for customer loyalty because it shows how much profit you can make from each customer. In fact, companies tend to encourage existing customers to purchase goods or services of increasing value. For example, a luxury brand customer might choose a keychain as their first purchase and later buy a shirt, a bag, or pair of shoes.
To calculate Gross Margin per Customer, you need to know the revenue from each customer and the cost of goods sold to that customer.
Customer Satisfaction (CSAT)
Customer Satisfaction is the percentage of customers who are satisfied with your company's products or services.
To calculate Customer Satisfaction, you need to know the number of customers who are satisfied with their purchase and the number of customers who are not satisfied with their purchase. Then, divide the result by the total number of customers and multiply by 100 to get the percentage.
A high Customer Satisfaction means that customers are happy with their purchases and are likely to buy again.
Do you want to know more about your brand loyalty? Ask customers!
A great way to measure customer loyalty is by asking customers themselves!
However, you must consider that there are two types of customer loyalty:
- Transactional loyalty is when customers continue to buy from you because they feel it is favorable.
- Emotional loyalty is when customers feel positively towards your brand and are less likely to switch to a competitor, even if it is cheaper or better.
You can measure both through customer surveys, focus groups, and social media analysis.
Here are two metrics to check:
Net Promoter Score (NPS)
The Net Promoter Score asks customers how likely they are to recommend your company's product or service to a friend or family member.
Through a satisfaction survey, you can define the following customer segments:
- Promoters: they love your company and are willing not only to buy several times but also to recommend you to friends and relatives;
- Passive: they are satisfied but not enthusiastic enough to recommend you to others or to reject offers from competitors;
- Detractors: they are dissatisfied customers who could tell their negative experience to others, thus damaging the acquisition of new customers.
To calculate the Net Promoter Score, you need to know the number of promoters, the number of detractors, and the total number of customers. You calculate the NPS by subtracting the percentage of detractors from the percentage of promoters.
A high Net Promoter Score means that you did great with customer loyalty.
Customer Engagement Rate
Customer Engagement Rate is the percentage of customers who are actively using your company's product or service. It shows how many customers are actually using what they've bought.
To calculate Customer Engagement Rate, you need to know the number of customers who are actively using the product or service and the total number of customers. Then, divide this number by the total number of customers and multiply by 100 to get the percentage.
The Customer Loyalty Index (CLI)
The Customer Loyalty Index (CLI) is a metric that takes into consideration different factors. Through a survey you can understand how likely your customers are to recommend you to others, buy from you again and try your other products. This gives you an idea about customer loyalty and customer retention.