How to Measure Customer Loyalty

Jan 09, 2020

7 mins read

Tanuj Diwan

Like every human emotion, loyalty is a subjective one. The idea of loyalty differs from person to person. Furthermore, loyalty is intangible in nature, which makes it extra difficult to measure.

You may not be able to measure the customer loyalty of your near and dear ones, but you certainly can measure the loyalty of your customers. There are several methods and even metrics that help with that.

let’s jump into discussing some ways to measure customer loyalty.

Why meddle with measuring something so abstract? Only if you measure customer loyalty via Customer feedback software can you figure out ways to maximize customer loyalty?

With customer loyalty comes more sales, higher profit margin, and continuous business growth.

Net promoter score

Net Promoter Score® is a simple yet powerful way to measure your customer loyalty. Here is why. The NPS® score is derived based on survey responses collected from customers. The NPS survey is not a lengthy one with too many questions, instead, it asks just one question.

“How likely are you to recommend us to family and friends?”

The idea behind this question is that loyal customers would be willing to refer the brand to their friends and family.

Based on the response that the customers give, they are segmented into 3 categories:

  1. What is Promoters – customers with a score of 9 to 10.
  2. What is Passives – customers with a score of 7 to 8
  3. What is Detractors – customers with a score of 0 to 6.

You can create specific customer retention campaigns for each segment of customers. In fact, you can also craft separate questions and workflows depending on the segment of customers.

Customer lifetime value (CLTV)

How to improve Customer Lifetime Value

Customer lifetime value is a measure of how valuable the customer would be to the company during the entire lifecycle of the relationship.

In other words, it is a measure of the profitability from the spending the customer would make right from the first acquisition until the end of the business relationship.

So, that makes a CLTV a time-bound metric. The higher the CLTV is, the longer the customer loyalty would be. CLTV is a good customer loyalty metric to track if your customer relationship is going to span over a couple of years.

Some examples include:

  • A subscription service
  • A mobile phone contract
  • A holiday club membership
  • A SaaS product

Loyalty program metrics

From Starbucks that sells coffee to BMW that sells luxury cars, almost every type and size of business has a loyalty program. A loyalty program is one in which the business offers the customer free goodies, points, rewards, concessions, etc. in return for completed transactions.

A classic example is the loyalty points you get on your credit card transactions. American Express offers 2% cashback on U.S. gas stations and at select U.S. department stores.

Now, rolling out loyalty points does not indicate that customer loyalty is received.

It has to be measured in multiple ways. There are sub-metrics that help measure customer loyalty achieved through loyalty programs.

They are:

  • Participation rate
  • Redemption rate
  • Engagement rate

Participation rate

Imagine a loyalty program rolled out to 100 customers. If 40 customers participate in the loyalty program, then the participation rate is calculated as 40%. Ideally, the participation rate should be close to maximum.

You can calculate a loyalty program’s participation rate with the below-mentioned formula:

Redemption rate

The next stage of participation is redemption. How much composition of the customers who participate in the loyalty program are redeeming loyalty points? An effective loyalty program would drive maximum redemption.

It indirectly implies that the customer is actively engaged with the brand and are using the loyalty points to purchase more.

Redemption rate can be calculated with the below-mentioned formula:

Engagement rate

Engagement rate is a follow-up on the redemption rate. It aims to calculate the frequency or regularity with which customers engage in the loyalty program.

The frequency is calculated within the stipulated period of the loyalty program. You may also look at customers who are actively engaging in the loyalty program during the period to gauge their loyalty.

Engagement rate is determined with the below-mentioned formula:

Customer Loyalty Index (CLI)

Customer loyalty index can be called an extension of the Net Promoter Score®. While NPS® asks one question to gauge customer loyalty, customer loyalty index takes into account responses to two more questions. They are:

  • How likely are you to recommend us to your friends and family? (As in an NPS® survey.)
  • How likely are you to buy from us again in the future?
  • How likely are you to try our other products?

The average of responses to all three questions are used to calculate Customer Loyalty Index. The benefit of CLI is that it gives more insights into the future relationship with the customer.

However, there is a caveat. Not all customers might give a genuine response to all the questions. This makes the results a bit ambiguous and uncertain to rely on.

Customer engagement metrics

Engagement is another form of loyalty. Customers engage with your business primarily by buying more, engaging more with content or by performing specific actions — like using a mobile app consistently.

Based on these traits, there are some customer engagement metrics you can track to measure customer loyalty.

Purchase frequency

How often do your customers purchase from your business? The more frequent they purchase, the higher the loyalty.

The purchase frequency metric can also be paired with the Average Order Value metric. Together, they show the big picture of how customers are engaging with the business.

Frequent engagements with high average order value is an ideal scenario.

Session time

If your business is heavily reliant on the time that users spent on your website, then session time is a critical measure.

It is also applicable for mobile apps and similar interactive services.

A longer session time indicates that users are resonating well with the content and the services that your business is offering. Needless to say, that breeds loyalty in the long run.

User actions

Sign up. Add new users. Feature adoption. Service upgrade. These are some user actions that indicate that al is well with the users and your business. These actions are all positive in nature and ensure that customers are loyal.

Active users

You can have 1,000 users who signed up for your product. Of that count, how many are actively using the product. A higher count of active users is considered to be healthy since it means the business is offering the right mix of products and services.

Customer retention metrics

Customer retention is like the opposite side of customer acquisition. If acquisition aims to acquire new customers.

customer retention aims to retain the customers that it has already acquired.

There are three major metrics that help in measuring customer retention.

Customer churn rate

As the name suggests, the customer churn rate is a direct measure of the number of customers who have churned during a given period of time. The churn could be attributed to a number of reasons like:

  • Bad onboarding
  • Negative customer experiences
  • Bad customer support
  • Hike in prices
  • Unmet expectations, etc.

Repeat purchase probability

Of all the customers who have purchased from you, how many of them would make another purchase? Repeat purchase probability aims to measure that probability or likelihood. It is calculated using the below-mentioned formula:

Final thoughts

Can we measure the beauty of art in absolute terms? Or for the same reason, the depth of emotion? These are all abstract concepts that are intangible in nature and hence difficult to measure and monitor.

Luckily, in business environs, it is possible to measure customer loyalty. The metrics discussed above help you measure customer loyalty in an approximate manner.

Know of any other metrics that measure customer loyalty in a better way? Let us know in the comments.

How much did you enjoy this article?