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10 Effective Ways To Measure Customer Loyalty

by Simon Spyer on May 25, 2016 6:32:19 PM

How To Measure Customer Loyalty

10 Effective Ways To Measure Customer Loyalty

All marketers want to maximise customer loyalty. But how do you know if you have loyal customers and what you should be seeking to improve?

There are 10 effective measures of customer loyalty that will be relevant to all businesses and which should be carefully monitored to set your loyalty strategy, measure your success in delivering it and fine tune your marketing activities. 

Share of wallet

This is an often overlooked measure but it will reveal the ‘true’ loyalty of your customers.
 
Share of Wallet measures the proportion of your customers’ spend in your category that you capture.
 
It’s calculated as:
customer spend / customer category spend
An individual’s capacity to spend in your category is finite. Growing the category (getting more people to buy the category is of course a valid marketing strategy) but in the arena of customer loyalty, share of wallet is a sanity metric of great significance - understand it and you will find it easier to build effective customer retention strategies.
 

Customer Lifetime Value

Customer Lifetime Value (CLV) is a simple calculation but one that suprisingly few businesses are able to calculate.
 
It's calculated as:
(average transaction value X the average number of times a customer transacts before lapsing) - your cost per acquisition (CPA)
There are a number of alternatives, for example, applying your gross margin rather than your CPA.
 
Data issues can make it hard for some businesses to quantify but CLV is a key measure of customer loyalty, particulary when its performance is tracked over time. 
 
It also informs how much you can afford to invest in a customer relationship which is obviously key to designing a CRM strategy and its business case.
 

Sales per customer

A little more rudimentary than CLV but nonetheless a useful metric.

Sales per customer is calculated as:

Revenue / Number of customers

Trends in sales per customer can help you understand the value of customer segments and removes the effect of changes in the absolute number of customers. 

Active Customer Volume

Another seemingly basis but important measure of customer loyalty.

Knowing the number of active customers (and 'active' could be defined as transacting or engaging with your content) and how this trends will give you an indication of engagement.

Visit Frequency

A key measure of customer behaviour and a proxy for Share Of Wallet.

Measure how frequently your customers visit you and you will have an effective measure of customer loyalty. 

Yes, they could also be visiting your competitors but visit frequency is a powerful measure that will hlp you to triangulate customer loyalty.

Recency

Allied with visit frequency, Recency is a powerful loyalty measure.

So spend per customer or visit frequency are increasing but if recency - how recently a customer transacted with you - is falling then you may have a significant problem.

In high velocity categories, like online gaming and retail, changes in customer recency can be highly sensitive and indicate low levels of 'true' loyalty.

Spend per Transaction

Sometimes referred to as Weight of Purchase, this measure indicates the depth of investment that a customer is making in your business.

While important measures such as visit frequency and active customer volumes are trending positively, changes in spend per transaction could suggest subtly but fundamental changes in customer behaviour.

Spend per Transaction could change as a result of pricing changes but also as a result of customers starting to split purchases, potentially also spending at competitors.

Retention Rate

A critcial measure of customer loyalty.

Calculated as the number of customers active in the latest period who were active in the prior period, Retention Rate (also referred to as Churn, Attrition or Lapsed Rate) is one of the best measures of customer loyalty.  

Engagement index

How you calculate this will depend on the nature of your business but this measure looks at the degree to which your customers are actively engaging with you - factors like email clicks, offer redemptions and referral could all be important and an engagement index is typically a composite of several factors.
 
The key is to try to understand: 
  • A deep emotional connection with the brand 
  • High levels of active participation 
  • A long-term relationship

Net Promoter Score

'How likely is it that you would recommend our company/product/service to a friend or colleague?'
 
Much has been written about NPS and it is an excellent measure of customer advocacy - and in turn customer loyalty.
10 Ways To Maximise Customer Loyalty

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This post was written by Simon Spyer

Co-founder & Insight Partner at Conduit, professional insight-monger, dad, lover of all sport and Spurs.

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