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.