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Why is Customer Loyalty important to a business?

What is customer loyalty?

Customer loyalty is when a customer chooses a particular brand over the other similar providers in the market. This is so because he believes that the product and the experience have added value to him. He believes that the experience that he has had in dealing with this brand cannot be replicated by others. Such customers act as evangelists, encouraging their friends and folks to purchase from the same brand. Also, in such a scenario, the price is not a major factor of concern for the customer. He is willing to pay a higher price for the experience. Strangely, a customer could be loyal even if the product is not the best in the market.

This quote by Shep Hyken on customer loyalty defines it best:

“Customer satisfaction is a rating. Loyalty is a brand.”

Why is customer loyalty important?

It is a measure of customer experience

Simply put, customer loyalty is an indicator of the quality of the relationship that a brand has had with its customer. It is a reward for how well an organization has addressed the customer’s needs and expectations. If a customer is loyal, the organization is succeeding in providing an enriched customer experience.

It is an indicator of revenue and profitability

Profitability and predictability – the two most important parameters for any business to succeed – are determined by such customers. Loyal customers are more likely to spend more on a brand than other customers are; so, such customers give a fair idea of revenue to the businesses. Further, because they are willing to spend more, cross-selling and up-selling to such customers requires less effort and resources. Thus, they help businesses to predict their future revenues. Therefore, the concept of customer loyalty is not about just holding on to customers; it also is an opportunity to maximize revenues.

Source: CustomerGuru

It is more expensive to acquire new customers than to retain old ones

Various studies have proven that it is anywhere between five and twenty-five times more expensive to acquire a new customer than to retain an old one. Loyal customers reduce the cost of acquisition and cost of service incurred by a  business. So, the growth of an organization can be easily achieved by having loyal customers.

Loyal customers refer more customers

Apart from readily spending more on a brand, loyal customers also refer their friends and folks to the brand. They are evangelists of the brand – walking billboards of the brand. That is why it is rightly said that when you have loyal customers, you don’t need marketing and advertising.

It differentiates you from your competition

Loyal customers will never desert a brand, even if the price is high. Simply because they understand that this level of service cannot be replicated. Hence, loyal customers are what differentiates the best from the regular brands.

How to measure customer loyalty?

There are various metrics that can measure customer loyalty. Here are a few.

Net Promoter Score (NPS)

The Net Promoter Score is the most renowned metric to measure customer loyalty. It is a management tool that can gauge customers’ loyalty just by asking one simple question:

“On a scale of zero-to-ten, how likely is it that you would recommend us (or this product/service/brand) to a friend or colleague?”

Omoto NPS scale

The responses recorded to this question give the company a measurement of the customers’ feelings. This question should be followed up with at least one question:

“What is the primary reason for your score?”

The answers to this open-ended question enable the company to know the reasons for these feelings and behaviours in the customers’ own words.

Customer Lifetime Value (CLV)

The Customer Lifetime Value is an indicator of the total net profit that a business gets from its association with a customer over the customer’s relationship with that business. Simply put, it is the total amount that a customer is expected to spend in your business across his relationship with you.

A simple manner of calculating the CLV is:

Average value of purchase * frequency of purchase * average length of the relationship of customer

Retention Rate

The retention rate is one of the most basic and critical metrics for calculating customer loyalty. The following are the parameters that are needed to calculate the retention rate.

Retention rate can be calculated as:

[(NE – NN)/NS]*100

How to improve customer loyalty?

In our earlier posts, we have discussed how you can gain customer loyalty by following this ultimate cheat-sheet to customer loyalty. Also, read this one to understand how you can solve some problems that you’d face with gaining customer loyalty.

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