Customer loyalty, sometimes referred to as brand loyalty, is the result of a positive relationship between you and your customer. Strong customer loyalty increases the likelihood of that customer repeatedly buying from your brand, as opposed to switching to a competitor.
Good customer loyalty is linked to high customer retention rates, improved customer acquisition and higher revenue. In short, understanding and harnessing customer loyalty is a powerful tactic for growth.
Why is it important to measure customer loyalty?
On average, it costs five times as much to attract new customers than it does to retain existing ones. So higher customer loyalty and retention means you don’t need to rely as heavily on high-cost customer acquisition.
High customer loyalty can also be a powerful marketing tool. In today’s digital ecommerce world, positive reviews have a big impact on sales. As few as five quality product reviews can increase the likelihood of purchase by 270%.
Beyond just leaving reviews, the most loyal customers can be great advocates for your brand, with 77% of customers willing to recommend a business to a friend after just one positive experience.
Six metrics to measure customer loyalty
With the understanding that customer loyalty is an important aspect of your brand’s success, it’s important to be able to quantify it. There are multiple ways to calculate most metrics, so we’ve included a simple example formula for each one.
Here are six ways to better understand and analyse customer loyalty:
1. Customer lifetime value
Example calculation: customer lifetime value = average annual revenue per user / average lifetime of customer (in years)
Customer lifetime value (CLV) — also known as LTV — provides insight into the total revenue that can be attributed to relationships with a customer. It can be used to predict future purchase estimates, and is a key metric for singling out high valuable customer segments. Relevant customer segments can then be targeted further through personalised marketing campaigns.
2. Customer engagement score (CES)
Example calculation: customer engagement score = (w1 x n1) + (w2 x n2) + … + (w# + n#)
w = weight given to an event and n = number of times the event occurred. An ‘event’ is something happening that shows engagement (such as a review), while ‘weight’ is a measure of how important that event is to your business.
A customer engagement score indicates how much and how often customers engage with your website, social media channels, general media, and how often reviews are submitted. Higher engagement reflects greater enthusiasm for a business and its products or services, and can also indicate to what extent customers feel listened to and understood by a business.
However, it’s worth bearing in mind that many loyal customers are not necessarily active on social media or even likely to leave a review, so CES is best analysed in conjunction with other metrics.
3. Repeat purchase rate
Example calculation: repeat purchase rate = total repeat customers / total paying customers
Repeat purchase rate indicates the rate of customers that purchase certain products several times. A high repeat purchase rate is a great signal of customer loyalty, and customers who are already committed to buying certain products demonstrate trust and confidence in your brand.. This means they’re much more likely to try out other products on offer, so you can use this metric to discover which customers will be responsive if you target them with new products.
4. Net promoter score (NPS)
Example calculation: net promoter score = % of Promoters - % of Detractors
The net promoter score (NPS) is an established calculation to understand your customers’ sentiments towards your brand. It typically consists of a single question:“on a scale of 1-10 how likely are you to recommend us?”, recording positive (9-10), negative (1-6) and neutral (7-8) responses.
NPS is widely used because of how simple it is to calculate and track over time. It can be used as a ‘cold’ survey, sent to your whole user base or specific audiences, or it can be triggered after specific events to measure individual aspects of your customer experience. Segmenting the results by different customer groups will help you spot where your brand could provide better customer experiences and increase customer loyalty.
5. Upsell ratio
Example calculation: upsell ratio = number of customers who purchase additional services / total number of customers
Another great metric for measuring customer loyalty is the upsell ratio. This is the ratio of customers that have bought multiple types of products, compared to customers who have bought only one.
Upselling specifically refers to the practice of buying higher value options over lower value ones, while cross-selling is the practice of buying more products than initially intended. Upsell ratio actually takes both these into account as the buying of more products and higher value products are both positive outcomes.
6. Customer churn
Example calculation: customer churn rate = (number of customers churned in a given time period / total customers at the start of that period) x 100
Customer churn rate is effectively the rate at which customers stop doing business with your brand. For long-term success, keeping churn low — and therefore retention high — is just as important as winning new ones. The average churn rate for B2C companies is 7%, and 5% for B2B brands. When tracked over time, an increasing churn rate shows customer dissatisfaction, with more of your customer base choosing to take their business elsewhere.
Don’t turn away loyal customers with a poor payment experience
Customers can leave your business because they're not happy with the products or services, which is classed as ‘voluntary churn’, and to reduce that you need to increase customer loyalty. But approximately 20-40% of all churn is ‘involuntary churn’, which is where a customer wants to use your service but is unable to (often down to payment issues).
Payment methods with high payment failure rates or poorly implemented multi-factor authentication will only add to your rate of involuntary churn. Open banking payments, such as TrueLayer’s payments solution, have payment acceptance rates as high as 98.5%, and typically convert better than card payments.