Customer Loyalty: The Ultimate Guide to Customer Retention

Customer Loyalty: The Ultimate Guide to Customer Retention
Table of Contents

Whether you’re a new business owner or have been doing this for years, there’s one thing that never changes: you need to be able to attract and retain customers. Customer loyalty is important.

While some businesses (usually big ones) can afford to spend a ton on acquiring new customers, you need to be smart about how you spend your money. Why? Because acquiring new customers is much more expensive than keeping existing ones. Repeat customers typically spend more, are more forgiving, and are easier to sell to.

In this guide, we’ll show you how customer loyalty works, why it is essential to your long-term success, and how you can build loyalty to your business.

What is customer loyalty and why should you care about it?

Customer loyalty is what every business wants. It’s when a customer makes a purchase from and continues to buy products or services from the same company over a long period of time.

Customer loyalty is often driven by customer satisfaction, which in turn is determined by the quality of the product or service, the level of customer service, and the customer’s overall experience with the company.

Consumer preferences, customer satisfaction, the number of purchases, price sensitivity, and brand advocacy are all factors that influence consumer loyalty.

Benefits of customer loyalty

There are plenty of reasons to care about loyalty and customer retention. Not only is it one of the most cost-efficient ways to keep your customers and increase profits, but it’s also one of the most impactful.

Think about it this way: if you’re able to turn first-time buyers into lifelong fans, you won’t have to keep spending money on customer acquisition. You’ll be able to focus on other areas of your business (like product development or employee engagement).

What’s more, with the right focus on experience and satisfaction, customer loyalty can lead to brand loyalty. Customers who are loyal to your brand are also more likely to refer others. And we all know that word-of-mouth is one of the most powerful marketing tools out there.

If you’re still not convinced, consider these customer loyalty statistics:

The probability of selling to an existing customer is 3x to 35x higher than selling to a new one (Markinblog)

Consumers that are loyal to a brand are more than willing to refer that brand (59%) to their friends and family, join their loyalty program (59%) and spend more (36%) (Yotpo)

92% of loyal customers rank price and value as the top driver for loyalty to specific retailers, followed by product/quality at 79% and variety/selection at 71% (ICSC)

Prices would have to be at least 10% lower to get millennials to switch from one major retailer to a competitor (Dinesh Gauri)

41% of U.S. consumers are loyal to organizations that present them with new experiences, products or services (Accenture)

Existing customers are 50% more likely to try new products, and spend 31% more than new customers (Koyne Marketing)

Consumers with an emotional connection to a brand have a 306% higher lifetime value, stay with a brand for an average of 5.1 years vs. 3.4 years, and will recommend brands at a much higher rate (71% vs. 45%) (Motista)

The types of loyalty

There are three key types of consumer loyalty; emotional, habitual, and rational.

Emotional loyalty is when customers are loyal to a brand because of the way it makes them feel. This type of customer is usually highly engaged with the brand and has a strong emotional connection to it. They are most likely to promote it to others.

Habitual loyalty is when customers are loyal to a brand because it’s convenient or because they’re used to it. This type of customer is usually less engaged with the brand and is more likely to switch to a competitor if they’re offered a better deal.

Rational loyalty is when customers are loyal to a brand because it offers the best value for their money. This type of customer is usually price-sensitive and makes decisions based on logic rather than emotion.

Brand loyalty vs customer loyalty

Customer and brand loyalty are often used interchangeably, but they’re not quite the same thing.

Brand loyalty is mostly concerned with the perception customers have of a brand. It’s the customer’s emotional attachment to the brand, and it’s usually based on factors like customer service, reputation, and image.

Customer loyalty, on the other hand, is more practical. It’s the customer’s spending power and purchasing behaviour—what they actually do (or don’t do).

For example, let’s say you’re a customer of a particular brand. You’re happy with the product and the customer service is good. But then you find a similar product at a lower price from another brand. Are you loyal to the first brand? Or do you switch to the cheaper option?

A brand-loyal customer would stick with the first brand, even if it’s more expensive.

In other words, brand loyalty is emotional, while customer loyalty is behavioural.

Build loyalty by learning about your customer base

Customer loyalty can be built in a number of ways, but it always starts with a deep understanding of your customer base. Establishing customer loyalty means knowing who your customers are, what they want, and how they want it.

Collect data on your customers’ preferences and needs

The best way to understand your customers is to collect data about them.

This data can come from your CRM, from customer interviews and surveys, from customer service interactions, and even from listening to social media.

You should also use feedback surveys, such as NPS, CSAT and CES, to collect customer data.

NPS (Net Promoter Score) measures customer loyalty and satisfaction, while CSAT questions (Customer Satisfaction Score) assess customer satisfaction with a specific interaction or purchase. CES (Customer Effort Score) is a measure of customer loyalty and satisfaction that assesses how easy it is for customers to do business with you.

These surveys have become widely accepted and the scores are proven to be predictive of customer loyalty. When done well, customer feedback surveys are one of the most reliable ways of gaining valuable insights into consumer behaviour and preferences.

Once you have collected a baseline dataset, you can start analysing the data and developing strategies to strengthen customer loyalty.

Analyse the data you collect about customer preferences and needs

Once you have this data, you can start to look for patterns and trends in this data to get a better understanding of your customer base.

You can also use customer segmentation to further understand your customer base. Segmenting your customers based on factors like age, location, and spending habits can help you better understand the needs of different customer profiles and enable you to develop personas for them.

Some common things to include in a customer persona are:

  • customer demographics (age, gender, location, etc.)
  • customer needs and wants
  • customer pain points

Once you have a good understanding of your customers and your customer data, you can start to develop strategies to that promote customer loyalty.

Discover the factors that impact customer loyalty

When you have created a set of customer profiles that represent your customer base, you can start to look for the factors that impact customer loyalty.

There are a number of different things you can look at, but we would recommend starting with the results of your customer feedback surveys. Look at the average customer satisfaction score, Net Promoter Score, and customer effort score for each customer profile to learn which segment to focus on.

Another way to discover the factors that impact loyalty is to look at your CRM data to estimate the lifetime value and churn rate for each customer profile. This will allow you to search for common factors across this customer segment that lead to customer churn.

Some factors that have been found to impact customer loyalty are:

  • Customer service
  • Overall satisfaction and experience
  • Share of wallet
  • Quality of core offering

Once you have discovered the factors that common to your most loyal customers, you can start to develop strategies to improve customer engagement in other segments.

The effect of customer service on customer loyalty

Customer service is one of the most important factors that impact customer loyalty. In fact, numerous studies have shown that customer service is a key driver of loyalty.

Research from Yotpo found that 26.14% of customers said that customer service inspires their loyalty to a brand.

Another study by 24/7 found that after experiencing poor customer service, 47% of customers would switch to a competitor within a day, and 79% would take their business elsewhere within a week.

Further studies have shown the impact of customer service on customer loyalty:

  • 25% of customers have stopped doing business with a cable company because of poor customer service, 24% with a retail location, 22% with a financial institution, 21% with an online retailer, 20% with a wireless company and 17% with a travel company (Aspect)
  • 89% of customers say that a company providing poor customer service damages their impression of the brand (Loyalty360)
  • 67% of consumers said good customer service encourages them to stay longer and/or spend more money (ICSC)

In order to improve customer engagement through customer service, it’s important to ensure that your customer service team is properly trained and equipped to deal with customer inquiries and problems.

It’s also important to make sure that customer service is accessible and easy to use. This means having multiple channels for customer service (e.g. phone, email, live chat) and making sure you are responsive to customer inquiries. It’s important to show empathy to customers and try to resolve their problems in a timely manner.

One of the reasons customer service is so important is because it’s one of the few interactions that customers have with your company where they can provide direct feedback. This feedback can be used to improve the customer experience and prevent customer churn.

Finally, it’s important to measure customer satisfaction with customer service and use this data to continuously improve the customer experience.

The effect of a customer experience on customer loyalty

The customer experience is the customer’s perception of their interactions with your company. This includes all touchpoints, from awareness to purchase and post-purchase. Creating a positive customer experience is essential to encourage customer loyalty.

In fact, a study by Uject found that 66% of Americans view customer experience as important as quality or price in the retail interaction, and customer service as important as product quality and price when making a purchase.

Another study by Blackhawk Network found that 94% of consumers name a consistently good customer experience as the main reason they remain loyal to a brand.

With customer experience becoming increasingly important, it’s important to invest in customer experience management. This includes customer experience research, designing customer journeys, and customer experience analytics.

Improving customer experience requires a customer-centric mindset. This means putting the customer first in all decisions and designing customer journeys that are simple, with little friction, and that provide moments of delight.

It’s also important to understand how online and offline customer touchpoints are interconnected and how they impact customer loyalty. Physical and digital customer experiences are no longer separate—they are now intertwined. Creating a seamless customer experience across all touchpoints is essential to customer loyalty.

The most successful businesses of tomorrow will have a deep understanding of the customer experience at every touchpoint and will be customer-centric in their approach.

How to measure customer loyalty

Customer loyalty can be measured in a number of ways, including KPIs such as customer retention rates and customer lifetime value, as well as by tracking metrics like Net Promoter Score (NPS) and CSAT.

Customer loyalty KPIs

The most common key performance indicators for tracking customer loyalty are customer retention rates and customer lifetime value.

Customer retention rate is the percentage of customers who continue to use your product or service over a period of time. Customer churn rate is the opposite, and is the percentage of customers who stop using your product or service. A negative churn rate means that you are gaining more customers than you are losing.

Customer lifetime value (CLV) is the total amount of revenue that a customer will generate for your business over the course of their relationship with your company. Tracking CLV is a way to measure the financial value of customer loyalty.

There are a number of ways to calculate CLV, but the most common formula is:

CLV = (Average Order Value Average Purchase Frequency) Average Customer Lifespan

Customer loyalty metrics

Another way to measure customer loyalty is through surveying your customers to track your NPS and CSAT scores.

NPS is a customer loyalty metric that measures how likely customers are to recommend your product or service to others. It’s a useful metric for customer loyalty because it measures customer satisfaction and advocacy.

CSAT is a customer satisfaction metric that measures how satisfied customers are with your product or service. It’s a useful metric for customer loyalty because it measures customer perceptions of your company.

Tracking these customer loyalty metrics will give you insights into how loyal your customers are and how likely they are to continue doing business with you.

Proven strategies for building customer loyalty

There are a number of proven strategies for building customer loyalty, including creating customer loyalty programs, personalising the customer experience, and providing rewards and incentives to loyal customers.

  1. Get to know your customers better
  2. Personalise customer experiences
  3. Use rewards and incentives to surprise and delight
  4. Track your customer data in a CRM
  5. Make it easy for customers to do business with you
  6. Create a customer-centric culture and workplace
  7. Create a customer loyalty program
  8. Build an engaged community

Get to know your customers better

Building loyalty starts here. The first step is to get to know your customers better—you must have a deep understanding of what motivates and frustrates them.

Start by using feedback surveys and customer interviews to collect data about your customers. This customer data will give you insights into what they want and need from your product or service.

You are more likely to create a winning retention strategy if you start by focusing on your existing customers.

Personalise customer experiences

Personalisation is key to creating great customer relationships. Customers today expect a personalised experience, and they are more likely to be loyal to brands that provide it.

There are a number of ways to personalise customer experiences, including using customer data to create targeted marketing campaigns and tailoring the customer journey to the individual customer.

You don’t need to start with a complex setup to personalise customer experiences. Even small changes, like greeting familiar customers by name, can make a big difference.

Use rewards and incentives to surprise and delight

Rewards and incentives are a great way to surprise and delight your customers, and they can be used to build loyalty.

Customer loyalty programs, referral programs, and VIP customer programs are all forms of a reward or incentive scheme. However, they’re complicated enough to warrant their own section (read on to learn more!).

A simpler approach is to use small incentives to encourage customers to return. For example, a beauty salon might offer a customer a 10% discount on their next visit in exchange for the customer’s email address. Another business might send a special offer on the customer’s birthday.

These small initiatives can go a long way to increase customer loyalty.

Track your customer data in a CRM

You may have noticed that customer data is becoming a recurring theme in this guide. That’s because customer data is essential for creating loyal customers.

A CRM (customer relationship management) system is a customer data platform that helps businesses track customer data, interactions, and behaviour. Using a CRM will give you a single source of truth for all interactions that a customer has with your business.

This customer data can be used to create targeted marketing campaigns, personalised customer experiences, and loyalty programs. It is also essential for measuring customer loyalty.

Make it easy for customers to do business with you

Reducing friction is essential for keeping customers loyal. If your customers experience friction at any stage of the customer journey, they are likely to churn.

There are a number of ways to reduce friction, including making it easy for customers to find what they’re looking for on your website, offering multiple contact channels, and providing self-service options.

The most common tool for finding friction points is a Customer Effort Score (CES) survey. A customer effort score is a metric that measures how easy or hard it is for customers to do business with you. CES surveys are typically short (no more than five questions) and focus on the customer’s most recent experience with your business.

Creating a frictionless customer experience will require you to understand the customer journey and identify pain points. Once you have identified these pain points, you can take steps to reduce or eliminate them.

Create a customer-centric culture and workplace

It’s tempting to think that building loyalty is all about tips and tricks, tactics and strategies. However, the truth is that creating loyal customers starts with your company culture.

Your employees are the face of your company, and they play a crucial role in providing the exceptional customer service that can turn happy customers into repeat customers. Engaged and empowered employees are more likely to go the extra mile for customers and build the meaningful relationships that will keep them coming back.

Creating a customer-centric workplace starts with hiring the right people. Look for employees who share your company values and who are passionate about providing great customer service.

Once you have the right team in place, invest in their development. Provide them with the training, resources, and support they need to be successful. Run regular pulse surveys to measure your employee experience - and act on the insights you discover.

When your employees are happy and fulfilled in their roles, they will be more likely to create loyal customers.

Create a customer loyalty program

A loyalty program is a great way to reward loyal customers and encourage them to continue doing business with you.

There are a number of different types of loyalty programs, but the most common is a points-based system. Under this type of program, customers earn points for every purchase they make. These points can then be redeemed for rewards, such as discounts, free shipping, or exclusive products.

Another popular type of loyalty program is a tiered program. Under this type of program, customers earn points as they move up through different tiers. Each tier offers increasingly valuable rewards, such as access to exclusive events or VIP customer service.

  • Consumers who are eligible for exclusive offers are just as likely to shop with a brand because of the offer as they would be for a brand’s great customer service (89% vs. 92%) (Kelton)

The key to creating a successful loyalty program is to offer rewards that are valuable to your customers. Think about what your customers want and need, and design your program accordingly.

You should also make sure that your loyalty program is easy to use and that customers can easily track their progress. The last thing you want is for your customers to get frustrated and give up.

Finally, make sure you promote your loyalty program. Use social media, email marketing, and in-store signage to let your customers know about the program and how they can sign up.

Which leads us to…

Build an engaged community

An engaged community is a group of customers who are loyal to your brand and who actively promote your products or services.

Engaged customers are different from loyal customers in that they are not just satisfied with your product or service - they are passionate about it. They love your brand and they want to tell the world about it.

The best way to build an engaged community is to identify your most passionate customers and give them a platform to share their love for your brand. Engage with them on the platforms they already use, this might be social media, review sites, or even in-person events.

One way to do this is to create brand ambassadors. Brand ambassadors are customers who have a strong connection to your brand and who are willing to promote your products or services.

Encourage them to share their stories and experiences with your brand, and make sure you listen to their feedback. Use their insights to improve your products and services, and show them that you value their input.

Another way to build an engaged community is to create loyalty programs that encourage customers to share your brand with their friends and family. Offer referral bonuses, such as discounts or free products, for customers who refer new customers to your business.

Finally, make sure you are regularly active on social media. Use social media to share your brand story, engage with your customers, and build loyalty among your followers.

Customer loyalty is essential for any business - but it doesn’t happen overnight. It takes time, effort, and a lot of hard work. But the rewards are worth it. By following the tips above, you can build a loyal customer base that will stick with you for the long haul.

Tom Sutton

Tom Sutton

Co-founder, TRACX

Tom is the co-founder of TRACX, a no-code marketing platform that allows local business owners to collect customer feedback and create engaging marketing campaigns. With over 17 years of experience in entrepreneurship, product development, and marketing for businesses large and small, Tom is currently responsible for developing product and marketing strategies for TRACX.

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