Understanding Customer Loyalty
February 11, 2015
Customer loyalty can be simply defined as a customer’s probability or intent to do business with you over competitors or substitute products/services. The stronger a customer’s loyalty is to a business, product or service- the less willing they are to actively seek out competitors and substitutes; and the more likely those customers are to strengthen your business relationship by making additional or more frequent purchases.
Customer loyalty is expressed in a combination of :
- Behavioral Loyalty- defined by a customer’s actions such as purchases or attendance. (Actions)
- Attitudinal Loyalty- defined by a customer’s psychological disposition toward your business, such as preference and recommendation. (Intent)
Why is understanding customer loyalty important?
Establishing and building customer loyalty can reward a business in many ways.
Financially, businesses that are able to attain a high level of customer loyalty will have a more stable and reliable income stream. This is because loyal customers consider their business relationship to be more personal than transactional. They are emotionally invested with the business’ staff, products, services and/or vision- which makes those customers more forgiving about any small inconveniences or problems they may encounter. Loyal customers get your business through tough times.
From a growth aspect, loyal customers also have a tendency to seek out new ways to enhance their relationship with the business by purchasing new products and services or even increasing purchase frequency. This gives your business opportunities to expand product and service offerings with a much lower entry risk. It's can be 5 times more expensive to attract a new customer than to keep a current one. Loyal customers cut the cost of sales (the amount invested in campaigns) because when they come in unsolicited and buy more often, you have an easier time meeting sales quotas with less campaigning.
Businesses with loyal customers also have a unique opportunity to grow through brand advocacy (unsolicited referrals from existing customers). In this situation, as long as existing customers stay happy, the clientele list will grow naturally by word of mouth without extra effort from the business. This reduces the cost of customer acquisition (the amount invested to get each new person through the door) and allows revenue to be spent on other business improvements and expansions.
How does a business develop customer loyalty?
Customer loyalty is something that is built over time. Unless your competitors are failing to meet the needs of the market in some essential way- it is unlikely that your customers will become loyal within the first few transactions. You have to build a relationship and brand persona that gives the customer a positive feeling about doing business with you over the competition. This is why businesses invest a lot of money on retention oriented programs like rewards cards, customer service training, improving product or service quality, providing value added services and creating new forms of convenience- such as online shopping, preferred memberships or auto-renewal systems.
How do I measure customer loyalty?
There are many ways to measure customer loyalty. Many businesses like department stores run complex systems that offer in-store rewards cards to track frequency of purchases, learn customer buying habits and custom tailor communications like sales emails and coupons to build loyalty. Inherently, these data systems provide most of the information needed to determine how loyal a customer really is. But most small to medium sized businesses don’t have the kind of time and money to invest an elaborate customer loyalty program.
Luckily, the system and the measurements you utilize don’t have to be anywhere near that complex to get a fair idea of how loyal your customers are and whether or not your business is doing a good job of keeping them happy. Three key components of customer loyalty that any business can track are customer retention, satisfaction and referrals.
Customer Retention- This is a combination of the length, frequency and consistency of transactional relationships. The higher the scores, the more loyal the customer. For large companies, this is the hardest information to poll without using a complex system. Most smaller businesses have a lot less data to work with. And with class based business in particular, instructors and coaches can probably tell you which students are dedicated (consistency), have been with you for longer (length), and take multiple classes or book private lessons (frequency).
Customer Satisfaction- Customer satisfaction is typically scored based on periodic reviews or surveys. These are either time or transaction based. An example of a time based measure of customer satisfaction in the class based industry might be a survey sent out at the end of each season asking the customers to rate their experience at your facility. A transaction based example would be a follow up email after class, asking the student to rate today’s lesson. This is a simple measure of your ability to meet customer expectations and is valuable for finding common pain points in the customer experience that might detract from a customer's loyalty if they are not addressed.
Customer Referrals- There are two common methods of tracking customer referrals. The first is to track the number of referrals that have been reported to your business by new customers. The second is to evaluate your existing customers’ intent or likelihood to refer your business.
When tracking the number of referrals reported to your business, there are a lot of factors beyond your immediate control- such as whether or not existing customers are simply telling friends or attempting to refer interested parties who will take action. Further, you rely on the new customer to report each referral. That can give you great information about which customers are generating the most business. But it doesn’t give you a lot of information about customer loyalty and satisfaction with your business in general because you only hear about a select few customers.
A more holistic tool for measuring referrals is using a Net Promoter Score (NPS); it is based on one simple survey question. “How likely are you to recommend our business to a friend or colleague?” The answers to this question are grouped and put into an equation to better understand the level of positivity being spread about your business. For example, there may customers who do or would refer you, but the person referred has simply not made a purchase or reported the referral. There may also be some customers who are big advocates for your business, but the majority of word of mouth out there might not be as positive.
Customer loyalty is the strength of the connection between you and your customer based on behavioral and psychological factors. A strong bond between you and your customer cannot be built overnight. It takes a lot of hard work business-wide to cultivate an environment that builds loyalty and it takes time and effort to maintain it. But it’s worth it. Why? Because a loyal customer is happy and practically handles advertising and lead generation for you via word of mouth.
That opens up more of your budget to be spent on improving the core structure of your business, instead of constantly increasing money spent on advertising and sales to bring in new faces. Therefore it’s important to measure the three elements of customer loyalty (retention, satisfaction and referrals) and work consistently to improve your results. Understanding how customer loyalty is tying into your business can save you time and money and help you accomplish your goals quickly.