Measuring customer loyalty is science rather than estimation
REZWAN MD CHOWDHURY
Customers do final choices about where to spend their time, money, and effort each and every day. They might be professional between 9 am to 5pm, but consumers the rest of the time. In either case, the scenario is always the same for the seller to make their product or service offering the preferred choice. They do this by developing offers that will differentiate them from competitors, generate significant demand by customers, demonstrate greater value and build customer loyalty.
Loyalty is more than just customer behavior. It is a myth to assume that a customer is loyal just because they continue to buy from you. There are many reasons why a customer repeats purchasing which have little to do with being really loyal. What if you could measure the loyalty of the people around you? Thats impossible for friends, family, and partners and probably for the best. The loyalty of your customers, however, can be measured.
The difficulty comes from loyalty being an intention. And one that people arent always honest about. The benefits of loyalty are great, however. A loyal customer is likely to refer you to his or her friends and contacts, likely to continue buying from you as long as the need is there, not actively looking for other suppliers, not open to sales pitches from competitors, open to other products and services that you offer, easy going towards emerging issues and gives you time and trust to fix them, likely to give feedback about how you could improve.
Measurement is the first step in customer loyalty management. By measuring customer loyalty we can compare, aim, and improve. Here are the 5 most effective methods:
Net Promoter Score (NPS): This metric indicates the likeliness of your customer referring you to her friends. She answers this simple question with a value between 1 10. This is a powerful metric. Firstly because its simple, but also because of the fact that when you recommend a product, you put your own credibility on the line. NPS divides your customers into three categories: First one is detractors. Customers answering with a score of 6 or lower are segmented as Detractors. They wont recommend you to anyone, will probably not buy from you again, and might even hurt you through negative word-of-mouth. Second one is passives. Those with a 7 or 8 are segmented as Passives. They are quite satisfied, but not ecstatic enough to recommend you. They wont hurt you, they arent looking for alternatives, and theyll likely stick around as long as they dont run into a supplier with a better value proposition. Third one is promoters. Those with a 9 or 10 fall into the Promoters segment. They are your groupies, your equivalent of the people camping in front of the Apple store. Theyre likely to recommend you and buy from you again.
Your total Net Promoter Score is calculated by subtracting your detractors percentage from your promoters percentage. Your promoter-detractor ratio doesnt depend on your service and product quality, only. Some customers simply fit your company better than others. Repurchase Ratio: This measures the ratio of repeat purchasers over one-time purchasers. A purchase is at the core of a commercial relationship, which makes this metric a valid representation of customer loyalty. This metric can be easily distorted, however. If it takes a big effort to switch between providers, for example, you could have a large portion of repurchasers who would nevertheless switch if this effort would be mitigated.
The way to calculate this repurchase ratio differs per business model. If you have a subscription based model, you simply divide the number of customers that extend after their first contract period by the ones that cancel after their first contact period.
Its a bit trickier for transaction based business models, because the intervals between purchases arent fixed. To know your number of repeat buyers, you need to first calculate the average time between the first and second buys of repeat customers, as well as its standard variation. By adding two times the standard variation to the average time, you will have captured 95 percent of your repeat customers. Divide this by the number of non-repeat buyers, and you have your estimated repurchase ratio.
Upselling Ratio: This tracks the ratio of customers whove bought more than one type of product divided by the customers whove bought only one. This sounds similar to the Repurchase Ratio, but its different because it concerns another product. Buying new products is a clear indication of customer loyalty. The trust you gained through your customers previous experiences has reflected on your other product offerings. The more different the added product is from the first product, the more significant an indication for customer loyalty it is. You calculate the upselling ration by dividing your number of customers with multiple products by the number of customers with a single product.
Customer Loyalty Index (CLI): This is a standardized tool to track customer loyalty over time, and it incorporates the values of NPS, repurchasing, and upselling. It calculates all three values with an NPS-like questionnaire on a 6-point scale. 1 stands for Definitely Yes, 6 stands for Definitely No.
Your total CLI is the average score of the 3 responses. The downside of this approach is that you ask directly for the customers intention, which is less reliable than measuring actual behavior. The advantage is that this score incorporates all of the loyalty values. Also, by consistently sending this questionnaire over time, it allows you to systematically track changes.
Customer Engagement Numbers: Customer engagement is the most effective predictor of customer loyalty. Anyone can argue that compared to NPS and CLI, customer engagement metrics are easier to measure, to influence, and that theyre more strongly correlated with revenue and profits. Customer loyalty results out of positive interactions and experiences with your brand. These nurture emotional attachments that shield your customers from competitor influence. Through this, customer engagement is stimulates repurchasing, lowers price sensitivity and promotes referrals.
Customer engagement is indeed an interesting area, especially for online businesses for which its metrics are relatively easy to track. For offline products and services, though, the tracking is much harder.
The writer is customer loyalty and CRM professional
