What is customer loyalty?
Customer loyalty is an ongoing positive relationship between a customer and a business. It’s what drives repeat purchases and prompts existing customers to choose your company over a competitor offering similar benefits.
One way to look at loyalty is in the context of brand. People are loyal to a brand because they associate it with a positive experience, such as great customer service, feeling connected to brand values and ideals, or consistently high product quality.
It’s not about an individual product or service – loyalty happens as a result of multiple positive interactions that build up a feeling of trust over time. It also doesn’t mean that every interaction has to be perfect. Customer loyalty can withstand a few negatives, although too many will break down the strength of the connection.
In fact, customers won’t necessarily become disloyal from a poor experience, it’s about how well the business handles that problem. As Leonie Brown, Qualtrics XM Scientist, says:
People who had a bad experience with a brand, but the brand fixed it, are more loyal than customers who never had a problem in the first place.
“That’s because it involves trust.”
“Customer loyalty is the intention of continuing the relationship,” says Leonie. “Now when you measure loyalty, the key is to work out whether that actually means anything. If you’re thinking about the financials, it’s about share of wallet – how much do people spend with you on a regular basis?
What is share of wallet (SOW)?
Share of wallet (SOW) is the amount an average customer regularly devotes to a particular brand rather than to competing brands in the same product category
“So for example, some industries like supermarkets, people are actually not particularly loyal despite getting quite a large percentage of your share of wallet,” explains Leonie. “They may shop at the same supermarket every week, but they’ll jump ship if they’re offered a better deal elsewhere.”
Or if you consider things like mobile phones tariffs, insurance, or energy bills – they will usually have quite a large share of wallet for many years. But this isn’t to do with loyalty necessarily either. It’s usually because you’re either tied into this out of either necessity (you’ve signed a contract for a year or more) or inertia (you can’t be bothered to shop around).
So customer loyalty is more than just whether people are spending money with you – it’s about emotion and identity.
Leonie says that typically true loyalists:
- Understand your product/brand
- Believe your offering to be good value
- Identify with your product on a personal level
Loyalty and identity
As you’d expect, types of loyalty vary quite significantly across different industries.
“For example, if your business sells something called an identity product – that’s very different from an insurance product,” says Leonie.
The car that you own is an identity product. And the clothes you wear. Or the phone you carry.
“This is not necessarily about the amount of money spent. You’re loyal to this company because you associate this product or brand with your personal identity.”
That’s why brands do so much work on personas, explains Leonie. “Who are we trying to appeal to? And when brands lose sight of that, they tend to lose loyalty as well because they’re not sure who they’re selling to anymore.”
Why is customer loyalty important?
Customer loyalty is important for many reasons, not least because the effort of keeping a customer is substantially less than the effort of acquiring a new one. Why would you spend extra money to make a sale if you didn’t have to?
A repeat customer has a 60-70% chance of converting.
Plus, new customers are that much harder to convince as they have very little with your business. This means not only making them aware of your brand and business, but then a comprehensive marketing strategy to push them down the funnel to get them to purchase.
But your customers who’ve already bought from you are already fully aware of your business and a lot easier to convince to give you another try. That means the more repeat customers you have, the less you’ll have to spend on conversion tactics like abandoned cart offers.
But there are many other reasons too. Customer loyalty means your customers will keep coming back to you. But not only about repeat business – loyal customers typically spend more and they tell their friends.
Beyond reaching for their credit cards, loyal customers can boost your business in other ways. Whether you think of them as brand champions, Net Promoters or heroes of word-of-mouth marketing, your happy customers all have the potential to bring more business to your door. That may be by sharing their positive opinions about you on social media, leaving positive reviews or simply telling their friends and family.
READ MORE: What is Net Promoter Score (NPS)?
Higher share of wallet
Repeat customers typically spend more than first-time customers. After all, first-time buyers are likely to just be testing the waters with their first purchase.
Customer loyalty helps in effective planning. Customer loyalty enables businesses to predict growth more effectively, thus helping in financial planning. Marketing teams can identify committed customers who can be relied upon hence making it easier to make anticipatory decisions based on their budget.
Loyal customers shop regularly. Given their good experience with a brand, repeat customers have higher chances of returning. And their likelihood of making future purchases increases as they make more transactions over their lifetime.
What is Customer Lifetime Value (CLV)?
Customer Lifetime Value (CLV) is an important metric for businesses as it helps you to see the value of a long-term relationship, rather than a single transaction. It’s also tied directly to the company’s bottom line, which makes CLV especially useful for marketers and customer success teams because it allows them to quantify the value of an organization’s customer experience (CX) efforts.
“CLV is an analytical tool, not a perfect predictor of long-term performance. But for businesses that lack a quantitative view of what it takes to win and retain a customer over the long haul – and the value of doing so – measuring and monitoring CLV is immensely useful.”
Bill Gurley, Venture Capitalist
We’ve talked about customers being loyal, but in fact loyalty isn’t an on-or-off, yes-or-no thing. Some people will have stronger loyalty to your business than others. They may be strongly loyal at a certain point and become less so (or conversely, start off neutral and develop loyalty). You might notice that loyalty shows up in their purchasing patterns, but doesn’t lead to related behaviors like recommendations, referrals or positive reviews.
In fact, word-of-mouth (WOM) marketing is one of a business’ most important and powerful tools.
It drives $6 trillion of annual consumer spending, accounts for 13% of consumer sales, and people are 90% more likely to trust and buy from a brand recommended by a friend.
READ MORE: 11 ways to improve customer referrals
Because of its power and its complexity, it’s important to measure customer loyalty over time, using a range of metrics that capture the entire customer journey through business data and customer feedback.
That way, you can understand which parts of your customer base should be your priority, what drives loyalty behaviors, and how you can encourage customer loyalty towards your company. That’s true whether you’re a multinational corporation or a small business – knowledge and insight is the cornerstone of building customer loyalty.
How do you measure customer loyalty?
Because loyalty is emotional, it makes it a little tricky to measure. But by using X (Experience) and O (Operation) data metrics in tandem, your business can track customers showing loyal behaviors, and turn that data into actionable insights.
These 5 metrics can help you measure customer loyalty as part of a loyalty program.
1. Net Promoter Score
The classic example. NPS is used widely across all kinds of businesses to inform marketing strategy and monitor customer service and customer satisfaction. One of its key strengths is that most people know what it is and what constitutes a good score. This makes it very helpful for communicating outside your CX team.
It’s also conveniently short and sweet, consisting of a single question for customers to answer: “how likely are you to recommend us to family and friends?” Keeping track of your NPS – which records positive, negative and neutral responses to the question – helps you gauge how much of your customer base is likely to be loyal towards you.
The higher your NPS, the greater the loyalty you’ll receive from your customers – and the better the outcome for you. See the trajectory you want your NPS to follow for stronger loyalty in the simulation below.
2. Engagement with your brand
How often do your existing customers visit your website, leave reviews of their products and services, or interact with your social media channels? Engagement can indicate enthusiasm for your brand and products, and it also shows that the customer believes you are listening to them and that their engagement is valued.
Although it’s not an absolute predictor of loyalty – some repeat customers might buy faithfully for years but never write a review – it can be helpful to look at engagement alongside other loyalty metrics to build out the overall picture.
3. Repurchasing levels
How many of your customers are new, and how many are making a repeat purchase? By tracking the numbers of customers who are new vs your repeat customers over time, you can see how the customer retention rate rises and falls. It’s important to measure these figures as a proportion of the whole, rather than absolute numbers. Otherwise, a dip or rise in overall sales could present confusing results.
4. Multiple product purchases
Someone buying a single product repeatedly over time is good news for your customer loyalty levels and your chances for customer retention. But if a returning customer is willing to branch out to other items in your range, it could be even better.
A repeat purchaser who buys multiple products is likely to have confidence in your business as a whole. They don’t just like that thing you make – they like the customer experience they had with you, and they’re keen to explore more. When you’re looking at repurchasing levels, keep an eye on how many of these customers are broadening their purchase range at the same time.
5. Customer Loyalty Index (CLI)
Like NPS, this is a standardized metric that’s derived from customer surveys and measures the strength of a customer’s loyalty towards your brand. However, it has a couple more questions than NPS, as it also covers repeat purchases and multiple purchases.
However, it’s not a replacement for these measures, as it records the customer’s intent for the future, rather than their actual behavior. Measuring of customer intention scores and comparing them to reality over the customer lifetime can help you build up a more useful picture.
How do you encourage customer loyalty?
Great customer service
They may love your product or service, but if your customers don’t feel valued and respected when they do business with you, they’re unlikely to form a positive emotional connection to your brand. Certainly, customers appreciate friendly and pleasant service when they make a purchase.
86% of customers will pay more for a better customer experience
A good experience in retail goes a long way. But what’s often more powerful is how you receive feedback and what you do with it when you get it.
Customers who feel listened to and looked after when something goes wrong, or if they need support after a purchase, are likely to have positive emotion towards you in the future, and to tell others good things instead of bad – whether that’s via social media or face to face. Increased customer communication and customer satisfaction should follow.
A true understanding of the customer journey
Traditionally, businesses have measured success in terms of sales. But as our understanding of customer experience becomes more sophisticated, we can see that each purchase is part of a larger picture – the customer journey.
This includes your marketing and customer-focused advertising, your retail experience (whether online or offline), reviews about your products and those of your competitors, and what happens after a specific customer receives their product or service.
Together, all these touchpoints have an influence on customer loyalty, and by considering the journey as a whole you can target your efforts on the places they’ll have the most effect. That might mean improving response times, ironing out pain points in your website or booking engine, or simply managing customer expectations by clearly communicating the way you work.
Are there any times when you don’t want to encourage loyalty?
“Of course,” says Leonie Brown, Qualtrics XM Scientist. “You see that with insurance. They’ll start putting up premiums through the roof to try and encourage customers to go elsewhere.”
Research indicates that consumers are willing to share data to get personalized experiences. By leveraging customer data captured in a multichannel loyalty program, brands can make personalized recommendations, offer relevant promotions and upsell and cross-sell relevant products or services to consumers.
Long-term strategy, not short-term reaction
Why do customers leave companies they’ve been loyal to? Overwhelmingly it’s because they don’t feel the company cares about them. In the short-term, it’s relatively easy to please most types of customer with introductory discounts and loyalty perks.
They’ll probably appreciate their good luck and come back for more. But what about customers who’ve been loyal for longer? Too often, businesses take these kinds of customers for granted, assuming that their attachment to the brand is strong enough to be self-sustaining.
In fact, all customers need to feel cared about in order to stay loyal. And what’s more, the part of your customer base that’s been with you over the long haul will expect their status to make them more valuable, not less.
With a long-term customer retention strategy, you can proactively improve the experience for every segment within your customer base, and make them all feel suitably valued.
What does employee experience have to do with customers? More than you might think – it can actually be a strong driver of loyalty. Take Starbucks for instance, where 87% of customer affinity for the brand is driven by how it treats its employees.
That stat alone indicates that positive employee experience can be highly profitable, as well as making your workplace a nicer environment.
Customers warm towards brands who treat their people well, certainly. But more importantly, engaged employees who are part of a company culture that values them are much more likely to extend the same positive treatment towards customers.
Giving your people autonomy, respect, a good work-life balance and pay that they feel is fair for the work they do will all feed into your customer loyalty outcomes.
Want to learn more about how to increase customer loyalty and boost customer retention? Dig deeper with our guides.