Focusing on acquiring new customers at the expense of retaining existing ones is the best way to fall into the 'leaky bucket' trap.
Most businesses are aware of this, and improving customer loyalty is one of the primary levers to sustainably increase commercial performance.
However, one can only improve what one measures. To assist you in building your customer loyalty measurement framework, this article will present the key indicators and methods at your disposal.
To grow its revenue, a company has two main options: acquire more customers or retain its existing ones. It's well-established that it is 5 to 7 times more expensive to acquire a new customer than to retain one.
Naturally, the consequence is clear: your business should focus its efforts on retaining existing customers.
This approach, of course, applies especially to businesses that already have a significant customer base. While a new company is right to invest in acquisition, an established company should focus on improving customer loyalty.
However, due to inertia, many established businesses continue to allocate the majority of their budget to acquisition. This, as mentioned in the introduction, leads to the 'leaky bucket' scenario... or the 'Danaides' barrel if you're fond of mythology.
Avoiding this trap is a sufficient reason to focus on customer loyalty. But it's not the only one. Having loyal customers is also a way of:
Enhancing your brand image among your target audience.
Developing word-of-mouth and recommendations.
Building a community of ambassadors.
In a word, your loyal customers are your best salespeople. Investing in customer loyalty is therefore also a lever for acquisition.
The best approach to improving customer loyalty is to start by analysing it.
The analysis of customer loyalty aims to answer a number of key questions:
What is the degree of loyalty of your customers?
What percentage of your customer portfolio consists of loyal customers?
What are the purchasing behaviours of your loyal customers?
What are the characteristics of your loyal customers?
What factors influence customer loyalty?
The answers to these questions will help you devise your strategy for improving customer loyalty. To assist you in getting answers to these questions, we will present the main indicators and methods for analysing customer loyalty.
There are several indicators that can be used to measure the loyalty of your customers. Let's review the main indicators to be integrated into your dashboard.
The Customer Retention Rate, also known as the customer loyalty rate, measures the percentage of customers you have managed to retain over a given period. A high Customer Retention Rate is generally a strong sign of customer satisfaction and loyalty. This KPI is crucial for assessing the longevity of relationships with your customers and the effectiveness of your retention strategies.
To calculate the retention rate, you need to use three pieces of data:
The number of customers at the end of the period.
The total number of customers at the beginning of the period.
The number of new customers acquired during the period.
Here is the formula to use:
This formula gives you a percentage that represents the proportion of customers you have managed to retain during the analysed period.
Let's take an example: you have 2,000 customers at the start of the period, 2,500 at the end of the period, and you acquired 800 new customers in the meantime, your retention rate is: (2,500 - 800) / 2,000 x 100 = 85%. This is a high rate. You only lost 300 of the original 2,000 customers.
The Repeat Purchase Rate measures the percentage of customers who make more than one purchase over a given period. This indicator helps you understand the recurrence of your customers' purchases. A high Repeat Purchase Rate suggests that customers are satisfied and loyal.
To calculate the Repeat Purchase Rate, you need to divide the number of customers who made more than one purchase during the period by the total number of unique customers in the same period. Then, multiply this figure by 100 to obtain a percentage.
For example: over a one-year observation period, out of 2,000 customers, 200 have made more than one purchase, meaning the Repeat Purchase Rate is 10%. Generally, a good Repeat Purchase Rate is considered to be between 10 and 20%.
The Upsell Rate measures your company's ability to encourage existing customers to buy additional products or services (cross-sell).
To calculate the Upsell Rate, divide the number of transactions that include an additional purchase by the total number of transactions, and then multiply this number by 100.
For instance: you sell phones and accessories. Over a six-month period, you made 5,000 phone sales. Of these sales, 1,000 customers also bought additional accessories, such as protective cases or chargers, at the time of purchasing their phone. Therefore, an Upsell Rate of 20% indicates that 20% of customers who bought a phone from you were also persuaded to purchase additional products.
The Customer Churn Rate, also known as attrition rate, measures the percentage of customers lost over a given period. It is the counterpart to the retention rate: Retention Rate + Churn Rate = 100%. If you have a retention rate of 85%, your churn rate is 15%.
The Churn Rate is calculated by dividing the number of customers lost during the period by the total number of customers at the beginning of the period. The result is then multiplied by 100 to obtain a percentage.
For example: you sell subscriptions. At the beginning of the year, you had 10,000 subscribers. By the end of the year, you find that 1,500 subscribers have not renewed their subscription. The Churn Rate is 15%, meaning you have lost 15% of your subscribers over the year.
The Customer Engagement Rate measures the degree of engagement and interaction customers have with your brand, whether through purchases, use of your products or services or participation in loyalty programmes and surveys. This KPI helps to understand how involved customers are with your brand, which is an important precursor to loyalty.
The calculation of the Engagement Rate depends on the specific criteria you consider representative of customer engagement. You must first define what an “active customer” means to you. Then, to calculate the indicator, simply divide the number of active customers by the total number of customers, and multiply the result by 100.
For instance: You have a total of 100,000 customers. Of these, 40,000 are enrolled and active in the loyalty programme. The Engagement Rate is 40%, meaning that 40% of your customers are actively participating in your loyalty programme.
The Customer Lifetime Value (CLV) is an estimation of the total value a customer will bring to your business throughout their relationship with you. This indicator is crucial for understanding the true economic "weight" of each customer and for guiding strategic decisions in terms of customer acquisition and retention. A high CLV indicates strong loyalty and long-term profitability potential.
There are several ways to calculate CLV, but the principle remains the same: you estimate what the customer can bring to you annually and multiply this estimate by an average duration of the relationship expressed in years.
This gives you an estimate of the value your customer will generate for your business over the course of their relationship.
The formula varies depending on the business model:
For a Retail/Ecommerce business, the average basket and the number of transactions are usually used: CLV = Average basket value X annual number of transactions X customer relationship lifespan.
For a business selling subscriptions, the CLV can be calculated by multiplying the subscription amount by the subscription period. It is essentially a simple adaptation of the previous formula.
Three additional notes on Customer Lifetime Value:
Unlike the indicators examined above, CLV is a predictive indicator. It relies on estimates based on
assumptions (formulated from an analysis of available historical data).
The "value" that a customer represents can be expressed in terms of revenue or profit. In the former case, CLV measures customer performance; in the latter, financial performance for your business.
CLV is a widely used metric in the subscription sector and, more generally, in all business models based on recurring revenues.
CLV = (Average Purchase Value x Average Purchase Frequency) x Average Customer Life Span
Let's take an example: you sell home appliances. The average basket spent by a customer per transaction is €200. The average number of times a customer makes a purchase in a year is 3 times a year. The average number of years a customer remains with you is 5 years. The CLV is €3,000, meaning that, on average, each customer is likely to spend €3,000 over the course of their relationship with you.
Customer satisfaction naturally breeds customer loyalty. That's why satisfaction indicators are useful for measuring your ability to retain your customers.
The three main KPIs for customer satisfaction are:
The Net Promoter Score (NPS), calculated by asking customers to what extent they would recommend your business to others on a scale of 0 to 10. Customers are categorised as promoters (9-10), passives (7-8), or detractors (0-6). This categorisation is very useful for marketing segmentation. The NPS is the difference between the percentage of promoters and detractors.
The Customer Satisfaction Score (CSAT), which measures overall satisfaction with a product or service through a direct question and a response scale of 1 to 5. The CSAT score is the percentage of positive responses (4 and 5).
The Customer Effort Score (CES) assesses the effort a customer has to make to obtain a service or solve a problem. It measures the smoothness of your customer journeys and, ultimately, the quality of the customer experience delivered. Because a good customer experience generates customer satisfaction, the CES can be considered an indicator of customer satisfaction. The CES is measured based on responses obtained from customers on a scale of 0 to 5 or 0 to 7. There are several methods for calculating the CES, the most common being to sum up the collected scores and divide it by the total number of scores.
As we have seen, customer loyalty indicators are measured either through satisfaction surveys (questionnaires) or by analysing your customer database. A third, complementary method is to implement social monitoring.
Satisfaction surveys are the primary tool for listening to the voice of the customer. They consist of questionnaires sent to your customers:
Either immediately after a significant customer interaction: a purchase, product delivery, service usage, contact with customer service, etc.
Or later on. 'Cold' surveys are used to ask customers more general questions.
The former are sometimes referred to as transactional surveys, and the latter as relational surveys.
Satisfaction surveys enable you to understand what your customers think about your company, your products, your services, and the experience you provide. While the use of satisfaction surveys is not new, the emergence of modern feedback management tools has greatly expanded the possibilities for businesses. They enable:
The dissemination of immediate surveys. For example: a customer contacts customer service and receives a survey right after their interaction with the advisor, inviting them to evaluate the exchange.
Targeted surveys. Questionnaires can be distributed based on specific triggers, in a marketing automation logic.
Detailed analysis of results.
Once again, customer satisfaction plays a decisive role in customer loyalty. Therefore, deploying satisfaction surveys is an essential tool for companies wishing to assess and improve customer loyalty. It's also perfectly feasible to include loyalty-oriented questions in these surveys. For example: "What could we improve to make you a loyal customer?".
Customer data analysis allows you to better understand your customers, their behaviour, habits, preferences... It also enables the measurement of the performance of your actions and relational programmes. Customer data is a treasure trove of information for businesses looking to identify the factors and levers of customer loyalty.
Most importantly, it must not be forgotten that customer data is used to build the various KPIs we presented above. Thus, from all points of view, measuring customer loyalty is inseparable from an analysis of customer data.
Data analysis will help you to:
Identify your loyal customers, their characteristics, and their purchasing behaviour.
Examine your customer journeys, to identify friction points and moments of truth that influence loyalty.
Assess the performance of your loyalty programmes to identify areas for improvement (point earning and spending mechanics, level of generosity, etc.).
Social monitoring involves keeping an eye on what your prospects and customers are saying about you on social networks, review platforms, discussion forums, blogs, etc. Social monitoring helps to enrich your understanding of how your target clientele perceives you.
Implementing a social monitoring system will allow you to complement the insights obtained from your satisfaction surveys. In fact, the logic is the same: listen to what your (target or existing) customers have to say about you in order to identify ways of improving the customer experience that will lead to greater customer loyalty.
Today, there are numerous tools available for closely tracking what consumers are saying about you on the internet and social networks. Make the most of them!
Measuring customer loyalty comes with a number of limitations that present challenges to be aware of. Here are a few:
Purchasing behaviour is not always an indicator of customer loyalty
. A customer who has not made a purchase in a long time may still be a loyal customer.
Customer satisfaction is not always an indicator of customer loyalty
. One can be satisfied with a purchase and not be loyal to the brand. Satisfaction indicators are not always indicators of loyalty...
Satisfaction surveys can have biases
. The way questions are phrased and the timing of survey distribution can influence responses.
Loyalty is primarily an emotional attitude that is difficult to measure
. Numerous emotional factors play into the loyalty of your customers and, beyond that, in purchasing behaviours in general. Customers are not solely rational beings. These emotional and subjective factors are difficult to grasp - especially if you limit your analysis to customer data. Hence the importance of complementing data analysis with satisfaction surveys.
Despite all its limitations, we recommend measuring customer loyalty to all our clients. Analysing customer loyalty is the best way to identify areas for improvement in customer retention.
We have seen that there are several methods to measure the loyalty of your customers: analysis of customer data, satisfaction surveys, social monitoring. Each method has its merits. They are complementary.
A piece of advice: favour a gradual ramp-up. For example, if you are starting from scratch, begin by focusing on establishing two or three indicators before considering the creation of comprehensive dashboards. And most importantly, never forget that analysis is the precursor to action. Analyses are only useful if they lead to an action plan aimed at increasing the loyalty of your customers. Now it's your turn!