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Customer loyalty: The key to business profitability

Tanuj Diwan
Jan 09, 2020

17 mins read

Tanuj Diwan

Hammond and Martha have been riding their 1970 Ford Consul for more than three decades. In 2003, when it was time to buy a new car, their only confusion was which model of Ford car should they go for. For them, no other auto brand other than Ford mattered. That is customer loyalty.

The unwavering decision of a customer to buy from only one brand and no one else. That is how we can best explain customer loyalty.

How do we define customer loyalty

In their thought-provoking book on customer experience ‘The Intuitive Customer’, Colin Shaw and Ryan Hamilton define customer loyalty as thus:

Now let’s break that long definition down into smaller chunks.

“Customer loyalty is the result of consistently positive emotional experiences…”

Customer loyalty is not built overnight. It takes several positive experiences to build customer loyalty. That makes it imperative for businesses to deliver top-notch customer experience at all times.

“…physical attribute-based satisfaction…”

The product or service that the brand sells has a unique physical attribute-based satisfaction, meaning the build quality of the product, the physical experience of using it or even the tangible feeling of touching it is exclusive and delightful.

Think Apple iPhones that have smooth corners and flawless touch screen experience. Or BMW cars which Steve Jobs called to be a work of art. The physical attributes of these products makes their customers loyal.

“…perceived value of an experience…”

The strong belief that some experiences can be served only by some brands also breeds customer loyalty.

For example, Disney World. It is the epitome of fun and amusement for children. Disney is so good at what it does that the brand itself has become a benchmark for every other fun and amusement park business.

“…which includes the product or services.”

Customer loyalty could be built with products or services. It is not restricted to either physical products or intangible experiences alone. Walmart selling SKUs and Netflix making animated movie experiences can create customer loyalty alike.

The elements of customer loyalty

Customer loyalty has been key to business profitability yesterday, it is crucial today and will remain so in the future. But, customer loyalty is not what it used to be.

In today’s digital age, especially one that is populated with millennial customers, customer loyalty is hard to come by. In any industry, for any product or service, there are countless alternatives that a customer can choose from.

All it takes them is a single (or a couple of sequential) negative experience to switch loyalty.

[pwc study] So, what keeps customers loyal? What makes them stay?

There are five major elements that turn ordinary customers into loyal customers. They are:

  1. Satisfied expectations
  2. Quality, value and convenience
  3. Stellar customer service
  4. Active customer engagement
  5. Organizational values

Satisfied expectations:

Ford managed to meet the quality expectations that Martha and Hammond had from a car. That one reason was enough for the couple to choose the brand when they wanted to buy a new car.

In other words, it is satisfied expectations that makes customers loyal.

When customers are evaluating a purchase, there are a couple of questions that do the rounds in their minds.

  • What am I paying for?
  • How much am I paying?
  • What will I get for what I am paying?
  • Will it solve my problem or reward me an experience?

If these expectations are ket or even surpassed, there is a higher probability of winning customer loyalty.

Any business which understands customer expectations and serves the right product or service can win their loyalty. However, with competition thickening by the hour.

It is necessary to deliver great experiences that go beyond the expectations of customers.

In the words of Richard Branson:

“The key is to set realistic customer expectations, and then not to just meet them, but to exceed them – preferably in unexpected and helpful ways.”

Quality, value and convenience

Ever since the days of the barter system, when mankind exchanged meat for meat, there has been one yardstick that has remained intact. It is quality. Customers expect quality in return for the price they pay.

When brands deliver great quality of products or services, they are able to create loyal customers.

In fact, studies by PwC has found that customers are willing to pay a premium price for a better customer experience.

Secondly, value and convenience. The millennial customers today expect more value and convenience above other bells and whistles. Starbucks has become the favorite coffee shop because of its grab N go convenience. So did McDonalds.

All the popular brands of today are offering quality products that also provide value and convenience to their customers. When all these three elements are provided consistently, customers keep coming back for more, which is the essence of customer loyalty.

Stellar customer service

When it comes to winning loyalty, there is nothing that beats stellar customer service. It is customer service which helps retain customers even when they are on the verge of churning.

Be informed that customer service is not attending to customer calls and giving them directions. It goes beyond that. Even a simple thank-you note for giving the opportunity to do business can go a long way in impressing the customer.

Or even melting their hearts as did Jim Shukys’ Auto did it. Jim writes a heartfelt thank-you note for every car repair job that he does. His thank-you went viral on Reddit and was followed by many customers who hailed his service.

Image source:  helpscout 

To put it in another way, every time a business transacts with a customer, they have an opportunity to create an emotional bond. Such bonds are stronger to break and can do good to the business as well.

Active customer engagement

Customer engagement and customer loyalty have a cause and effect relationship. Customer loyalty is the effect of customer engagement.

What is customer engagement?

It is the use of personalized business communication with a customer.

For example, a retargeting email for a customer who abandoned his online shopping cart. Or a chatbot message for a revisiting website visitor.

It could even be a seasonal greeting on social media.

Customer engagement is so rewarding for customers that it has paved the way to a whole new function — customer engagement marketing.

Customer engagement marketing aims to use the right channels and personalized messaging to create a connection with customers. It enables businesses to maximize customer experience, and in the process their loyalty to the brand as well.

Organizational values

Customers are increasingly aware of the good, the bad and the worst practices that businesses adopt to maximize their profitability.

Businesses that exhibit an ethical way of functioning, one that adopts fair business practices and even has an environment-friendly process tend to get the thumbs up from customers.

In fact, according to Salesforce research, 80% of customers remain loyal to businesses that ethical. 68% of customers would not buy from companies with poor ethics.

Customers tend to remain loyal to businesses that have a purpose that is larger than making profits. Howard Schultz, the CEO Starbucks says, “If people believe they share values with a company, they will stay loyal to the brand.”

Customer loyalty also brings several benefits to businesses. The best of them are described below:

The benefits of customer loyalty

When it comes to setting annual goals, every business, big and small aims to acquire more new customers. However, focusing on loyal customers has its own benefits.

A joint study conducted by BIA/Kelsey and Manta found that “61 percent of the SMBs surveyed report that more than half of their revenue comes from repeat customers, rather than new business.”

The benefits of customer loyalty goes beyond more sales as well. Some of them are:

  • Loyalty brings high-margin sales
  • Retaining customers is profitable than acquiring new ones
  • Significant reduction in overheads
  • Loyal customers become promoters (NPS)

Loyalty brings high-margin sales

Here is an overlooked benefit of customer loyalty. Loyal customers often buy high-margin supplemental products and services that the business offers.

In other words, they do not stick to buying only a certain type of product. Similarly, they do not stick to a specific price band as well. A loyal customer would always be willing to buy any product that the brand makes.

Take for example, GoPro the action camera. Although the camera is the primary product, customers also tend to buy original accessories of GoPro despite the availability of several cheaper alternatives in the market.

the GoPro’s high quality of products makes customers buy their other products as well.

Retaining customers is profitable than acquiring new ones

Countless studies have proven the economic benefit of retaining existing customers than acquiring new customers.

The most prominent of them all is the study conducted by Bain & Co.

The study found that a mere 5% increase in customer retention can increase a company’s profitability by 75%!

Another killer facts about customer retention is that the success rate of selling to an existing customer is 60-70% while the success rate of selling a new customer is 5-20%.

This is due to the fact that when loyal customers want to buy something, they will give your business the first chance to do business than anyone else.

And that can make a world of a difference to the bottom line.

It helps eliminate competition and all the costs required to beat it.

Significant reduction in overheads

You don’t have to market to loyal customers. You don’t have to spend on training and onboarding since they are already well-versed with the product.

You don’t have to spend on referral programs since loyal customers, by nature, tend to be brand advocates.

They spread the good word about the brand through word-of-mouth marketing thus bringing in more customers for almost zero cost.

In a nutshell, customer loyalty does help in a significant reduction in overheads.

Loyal customers become promoters (NPS)

Net Promoter score® is a popular measure of customer loyalty. It helps businesses gauge customer sentiments and also segment customers into three categories — promoters, passives, and detractors.

According to the concept of Net Promoter Score®, passives are customers with a score of 9 to 10. They show a high probability of referring new customers to the business.

Also, they are highly responsive in giving Customer Feedback or suggestions for improvement.

Their NPS® responses help the business introduce incremental to the product or service which in turn elevates the customer experience.

Ways to maximize customer loyalty

Given its importance, it is necessary that businesses spend resources to maximize customer loyalty. There are several ways how this can be done. Some of the surefire ways are as below:

  • Provide proactive customer support
  • Gamify purchases
  • Introduce conveniences
  • Display social proof

Provide proactive customer support

Great customer support has become passe. In fact, it is expected as a default offering.

In return for customer loyalty, customers expect proactive customer support. Proactive customer refers to all the measures and activities that a business undertakes to make the customer experience better.

For example, IKEA the Swedish DIY furniture manufacturer publishes a guide of how to assemble each of its furniture models.

The detailed assembly guide ensures that customers do not have to rely on external support to assemble the furniture.

They don’t have to reach out to customer support as IKEA has proactively provided information that they would be seeking post-purchase.

Gamify purchases

Do you know why Starbucks customers tend to go back to the Starbucks cafe every time they want to have a coffee?

Apart from the great service and taste, there is one more factor that helps Starbucks earn customer loyalty. It is their My Starbucks Rewards™ program.

The rewards program gives customers loyalty points in the form of stars each time they buy from a Starbucks cafe.

More the number of stars, the greater the rewards. What makes this loyalty program stay apart is that it can be tracked with the official Starbucks mobile app.

This gamification of purchases makes customers stay loyal to Starbucks.

Image source: thanx 

The same gamification exercise can be replicated in any business including retail, healthcare, software, fitness and much more.

Introduce conveniences

One thing that makes customers stay loyal, or rather stop looking for other options is convenience. It is the convenience of quick cab-hailing that has made UBER popular.

It is the grab N go model of standard menu items that has made McDonald’s the first choice.

Amazon Go was born out of the same need to be convenient. The new-age convenience stores from Amazon spares customers from the most dreaded chores of shopping.

Waiting in the cash counter. Unlike traditional convenience stores, Amazon Go uses a range of sensor fusion, computer vision, and deep learning to enable cash-free shopping.

Image source: amazon 

It is these kinds of conveniences that stokes the loyalty of customers.

Display social proof

Social proof collectively refers to the star ratings, reviews and testimonials that customers leave for businesses.

For new customers who are war of making a choice, social proof acts as an assurance that their choice is right.

Also, since it is user-generated, they are genuine and sheds light on the most intricate matters that even good marketing cannot bring to light.

Apart from giving assurance to new customers, social proof also helps in establishing a bond with customers who are already using the product.

They create an ecosystem or community of users who further advance the brand image of the business.

Harley Davidson is an example of social proof advances the brand image. Harley Davidson has several closed communities of riders who share the biker brotherhood.

In fact, the motorcycle manufacturer has its own sponsored group of owners called the Harley Owners Group (HOG).

Every new customer who purchases a new Harley Davidson is by default given a one-year membership of the club. Being part of the group is seen as a status symbol.

Image Source: Harley-Davidson 

Staying on track: Metrics to measure customer loyalty

Peter Drucker once said, “what is measured, improves.” So if you want to improve your customer loyalty, you must start measuring it.

When we say measuring, it means to look at the metrics and the tales that they can tell about how loyal your customers are.

Here are ten metrics that can help you measure customer loyalty the right way:

  1. Net Promoter Score
  2. Customer lifetime value
  3. Customer Retention Rate (CRR)
  4. Repeat Customer Rate
  5. Upselling ratio
    • Loyalty ratios
    • Participation Rate
    • Redemption rate
    • Active Engagement Rate

Net Promoter Score® (NPS®)

Net promoter score® is the best measure of customer loyalty. It shows the likelihood of a customer referring the business to her near and dear ones.

The level of loyalty is determined based on the score that they respond to an NPS® survey.

NPS is not calculated using a formula. Instead, NPS® tools are used to collect responses and segment customers.

Based on their responses, customers are segmented into promoters, passives or detractors.

Read our blog to get an in-depth understanding of Net Promoter Score®.

Customer lifetime value (CLTV)

Also referred to as CLV, customer lifetime value is an approximate measure of the profit that the business would gain from the customers’ lifecycle.

Customer Lifetime Value takes into account the frequency at which a customer buys from a business. It is this aspect that makes it a vital customer loyalty metric.

Customers who buy more and often would have a high CLTV. A high CLTV combined with reducing customer acquisition costs (CAC) means that the business is heading straight to profitability.

Formula for CLTV:

 

Customer Retention Rate (CRR)

The chances of a customer remain loyal to your business for a lifetime is a rarity. In every industry and business model, customer churn is inevitable.

The customer retention rate aims to calculate the composition of customers who are retained by the business from time to time.

A higher CRR is considered healthy as it indicates the business’s capability to retain its customers. In other words, maintain their loyalty.

CRR is calculated using this formula:

 

While calculating CRR, you have the liberty to use any period that justifies the volume and velocity of your business.

For example, B2B businesses opt for 365 days while B2C businesses often opt for a lesser span of time.

Repeat Customer Rate (RCR)

As the name suggests, repeat customer rate aims to measure the percentage of customers who engage in repeat customers from you.

When compared to CLTV, which is more of a long-term metric, RCR gives a real-time or current view of customer loyalty. Higher the RCR, better customer loyalty.

The formula to measure repeat customer rate is as below:

Upselling ratio

As discussed before in this blog, one of the key benefits of customer loyalty is that they engage in buying more high-margin supplemental products.

Upselling ration aims to measure just that. It is a measure of the composition of customers who have bought more than one type of product compared to just one category of product.

If the additional category of product is a higher version of the existing purchase, it indicates a higher upselling ratio.

The formula to calculate upselling ratio is as below:

Number of customers who bought multiple products / Number of customers with a single product

Loyalty ratios

To boost customer loyalty, every business has to dole out loyalty programs from time to time. But, what is the point in offering loyalty rewards if their redemption is not monitored? These loyalty ratio metrics help in measuring the redemption rate of your loyalty programs.

Participation Rate

The success of a loyalty program can be measured by looking at its participation rate. It shows the number of customers who are part of the loyalty program have actually participated in it.

It is calculated using the formula:

Redemption rate

If your loyalty program is designed to offer loyalty points for every purchase, redemption rate helps measure the composition of customers who have redeemed such loyalty points.

A high redemption rate shows a higher customer loyalty. If the points have been redeemed for repeat purchases, it indicates a strong sentiment of customer loyalty.

Redemption rate can be measured using the formula:

Active Engagement Rate

A peculiar thing about loyalty programs is that their engagement seems to fluctuate from time to time.

For instance, their redemption is usually highest during holiday seasons when the purchase volumes are also higher.

Now, what if there are other customers who are actively participating in the loyalty program all throughout the year?

They are customers who show a high measure of customer loyalty and hence should be taken care of in the best manner possible.

Active engagement rate helps measure the composition of customers who are actively engaging with the loyalty program on a regular basis. The formula for calculating active engagement rate is as below:

Bringing it all together

Be it for buying cars or your everyday groceries, customer loyalty matters. Customer loyalty brings repeat purchases, helps thwart competition and also results in high-margin supplemental sales. It also helps keep overheads like marketing and new customer acquisition to a bare minimum.

There are certain elements of a business that helps keep its customers loyal. These elements range from the kind of satisfaction that the customer derives from the product/service, the quality of service, convenience and also the organizational values exhibited by the business.

There is no single number or metric that can showcase customer loyalty. You need a range of metrics to establish that. These loyalty metrics help place a finger on how loyal your customers are.

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