Many people ask me for advice on how to measure customer loyalty. It’s actually quite a difficult question to answer because a lot depends on how you actually define ‘loyalty’.
In my previous article on ‘behavioural’ loyalty and ‘attitudinal’ loyalty (see article dated 10.06.16) I explain the difference between loyalty based purely on repeat purchasing (behavioural loyalty) and on a person’s emotional attachment to an organisation or a brand (attitudinal loyalty).
If you want to measure a customer’s behavioural loyalty, then two of the most commonly used metrics are Repeat Customer Ratio (RCR) for short term measurement of loyalty, and Customer Lifetime Value (CLV) for measuring long term loyalty.
On the other hand, if you want to measure a customer’s attitudinal loyalty, then the best metric to use is Net Promoter Score (NPS)*.
In addition, you can also utilise the well-known ‘Balanced Scorecard’ devised by Kaplan and Norton in the 1990s, although this complex marketing tool deserves an entire article of its own, and I will explain the use of the Balanced Scorecard in a future article on this website.
Here is a very brief explanation of these metrics:
Repeat Customer Rate (RCR)
How many of your customers buy from you more than once? This metric tracks how long customers continue to buy your products/services after their first purchase. You can use RCR as a baseline by which to judge the success of your loyalty programmes and track it on a monthly basis to determine what percentage of customers are coming back to you as each month passes.
Customer Lifetime Value (CLV)
This metric measures the total profit contributed by each individual customer during the entire duration of the time they purchase goods/services from your company. You can use your company’s data on annual revenue, purchase frequency, and purchase trends to predict the CLV for each of your customers. By tracking this metric over time, you can determine your highest-value customers and also try to understand what is hindering loyalty among your lowest-value customers.
Net Promoter Score (NPS) *
NPS predicts how likely your customers are to recommend you to a friend or colleague. Because of its ability to simplify our understanding of the often complex relationships between companies and customers, NPS is an essential tool for any marketer who wants to understand customer loyalty.
To determine your NPS, ask your customers to rate how likely they are to recommend you on a scale of 1 to 10. Those who select either a 9 or 10 are your key ‘promoters’ - the customers who are most likely to become ‘advocates’ of your organisation. Take the percentage of customers who are ‘promoters’ and then subtract those who are ‘detractors’ (those that rate you 6 or below) to gain the ratio of promoters versus detractors. This ratio is your ‘Net Promoter Score’.
* Net Promoter Score and NPS are trademarks of Satmetrix Systems Inc., Bain & Company Inc., and Frederick Reichheld.