In a world where your competition is only one click away, customer loyalty is crucial for staying relevant in any industry and profitable. Did you know that it costs today about 6 to 7 times more to acquire a new customer than keep an old one, while just a 5% increase in retention increases profits by up to 95%?
However, a common question has always been how to measure customer loyalty correctly. For many years, the net promoter score (NPS) has been perhaps the most widely used marketing metrics to do just that and has developed a reputation for being a link to business KPIs. However, over time the number of skeptics has grown, and at the same time, so have the alternative formulas in an attempt to attain such data more accurately. Let’s look a little deeper:
Advantages of the NPS
The sustained popularity of the NPS has stemmed largely from its greatest strength, its simplicity. It’s based around one single question that you can easily send it out to customers through email or post it on your website, which asks them how likely they are to recommend your business to a friend on a scale from 1-10. Customers who answer 9 or 10 are considered promoters, while those who answer 6 or less are rated as detractors. The score is the percentage of promoters minus the percentage of detractors. The calculation formula is intuitive; it doesn’t require a statistician to administer it or elaborate analysis to understand the results.
Furthermore, numerous studies have confirmed the prevailing business sentiment of the correlation between a high Net Promoter Score and revenue. In other words, when companies deploy the NPS survey and use it as a key metric, it helps to drive growth since a company becomes more aware and focused on improving the score. Finally, the NPS remains a standard measurement used by companies worldwide. Therefore, you can easily benchmark your Net Promoter Score and see where you stack up against your main competition.
Disadvantages of the NPS
help you evaluate customer loyalty, it doesn’t identify what motivates a customer’s stance. NPS does not make it clear why a customer would recommend or not, so a follow-up plan to act on the results is needed. A detailed customer satisfaction survey can be a useful starting point to help your service decisions. In other words, it’s only a starting point for a longer-term conversation with your customers, not a dialogue.
1) Customer Lifetime Value (CLV)
This metric has become very popular, especially within the world of e-commerce. Customer Lifetime Value (CLV), is the total profit that a customer is projected to generate over their entire lifetime as a customer of the brand. Customer lifetime value is a great measure of customer loyalty because it is fueled by how often a customer buys from you and how long they remain your customer. By analyzing customer loyalty over extended periods of time, the CLV is an excellent way to assess your brands' overall health and project future success.
2) Repurchase Ratio (RR)
While CLV is a great way to measure customer loyalty improvement over time, your repeat customer rate is an excellent way to view a current snapshot. "RR" measures the ratio of repeat purchasers over one-time customers. Being aware of the repeat purchase rate is valuable, to determine brand loyalty and because repeat customers are the foundation of loyal customers that create profitable businesses. In fact, according to some studies, they are responsible for generating 40% of a company’s revenue. Knowing your RPR allows you to understand how to make some customers become repeat purchasers and apply that knowledge to future marketing campaigns for new clients.
3) Upselling Ratio
This formula tracks the ratio of customers who’ve bought more than one type of product divided by the customers who’ve bought only one. While this method sounds similar to the Repurchase Ratio, it’s not because it concerns another product. The main idea is that buying new products is a clear indication of customer loyalty. The loyalty you gained through your customer’s previous experience has now been reflected in a different kind of sale. Furthermore, the greater the variation the new product is the first product, the greater the indication it is for customer loyalty.
The importance of customer loyalty cannot be overstated, and to improve retention rates, you need to know what those rates are. Whichever formulas you choose, just make sure you use them to create a customer experience that keeps them coming back for more.
[About the author] Dylon Mills is the Director of Marketing Content Strategy & Development at Jacada. As such, Dylon’s main responsibilities are to strategize, create and deliver content for Jacada’s product portfolio that align with the global Go-To-Market strategy, corporate positioning, and marketing campaigns. Dylon’s prior work experience includes Product Management at one of the top Fortune 500 Technology companies, Symantec Corporation. Outside of work, Dylon enjoys problem-solving and any project that includes building/tinkering with tools. Dylon holds a BS Consumer Economics from the University of Georgia.