Measuring Customer Loyalty: A Complete Guide
It’s easy to see the benefits of customer loyalty: increased sales and revenue, higher customer lifetime value (CLV), better experience, and more. However, it’s not as easy to measure an intangible quality like customer loyalty, which sounds more like a personal character trait than useful marketing data. Brands rely on behavior and performance metrics like Net Promoter Score, Repeat Purchase Rate (RPR), and others to help determine customer loyalty. Let’s take a closer look.
Measuring Customer Loyalty
One cannot improve what one does not measure. While customer loyalty itself is hard to quantify, expressions of loyalty can be measured by customer behaviors, business outcomes, and brand performance. The following metrics offer the most important insights into the loyalty of a brand’s customers.
Net Promoter Score (NPS)
Customer satisfaction is inextricably linked to loyalty. A Net Promoter Score (NPS) measures satisfaction with a single question like:
“On a scale of 0 to 10, how likely are you to recommend [brand X product or service] to your family and friends?”
NPS classifies customers according to their ratings. Those who score from 0 to 6 are considered detractors, while those who score 9 or 10 are seen as promoters. Passive customers, who, by definition, have no impact typically score 7 or 8.
The higher a brand’s overall NPS, the more satisfied its customers are likely to be. A high NPS also indicates customer confidence that the brand will make other potential customers (like friends and family) happy with its products and services.
Repeat Purchase Rate (RPR)
The Repeat Purchase Rate, also known as the repeat customer rate or reorder rate, measures the percentage of customers who make more than one purchase from the same brand. The typical formula for determining the repeat purchase rate is:
Number of repeat purchase customers (in a given time) / divided by
Total number of customers (during the same time)
Ranging from 0% to 100%, the higher the proportion of customers making repeat purchases, the more likely the brand is doing a great job of satisfying its customers. A low RPR, on the other hand, signifies that the brand is attracting one-time purchasers and not building loyalty among converted customers.
The upsell ratio reveals how much customers are willing to try new or different offerings after their initial conversion. Because loyal customers are usually more willing to try other products or services than new converts, a high upsell ratio indicates strong loyalty within a brand’s audience. This metric is calculated as:
Number of customers who made 2 or more purchases (in a given time) / divided by
Number of customers who made one purchase (during the same time)
The greater the price difference between the purchased products, the greater the customer loyalty indicated by the upsell ratio.
Customer Loyalty Index (CLI)
The customer loyalty index tracks loyalty over time by measuring NPS, repeat purchases, and upsells. Customers are asked to rate the likelihood they will 1) recommend the brand, 2) buy again, and 3) try other products or services.
Customer Loyalty Index = Average of NPS, Repurchase score, and Upsell score
One thing to note is that CLI, like NPS, only measures customer intent. However, when used regularly over a period of time, CLI gives a good indication of customer satisfaction and loyalty.
Active Engagement Rate (AER)
The active engagement rate measures the percentage of customers actively participating in a brand’s loyalty program. Note that AER does not include loyalty members who are passive or inactive. Activity may be defined through actions taken, referrals, or other metrics. The typical formula for calculating the active engagement rate is:
Number of active loyalty program members / divided by
Total number of customers
An AER gives brands a picture of their loyalty programs’ efficacy, based on active results rather than the total membership number.
The redemption rate gives another indication of loyal customers’ activity and engagement. It is calculated as:
Number of customers who spent or redeemed points / divided by
Total number of customers who have earned points
Tracking a brand’s redemption rate can highlight issues that could threaten loyalty, like low customer motivation, unsatisfactory rewards, or poor marketing of the loyalty program. A high redemption rate, on the other hand, indicates good engagement among loyal customers.
Customer Engagement Score (CES)
A customer engagement score assigns scores to individual customers based on their usage of a brand’s product or services.
Each CES calculation depends on the nature of customer engagement for a particular business. For example, a brand with a freemium model may factor in frequency and levels of product use. In contrast, a mobile app provider may track total activity time on a daily or weekly basis. These customer engagement events are weighted and numbered accordingly before combining them into a single number, usually from 1 to 10.
A high CES indicates a high level of engaged customers, while a low score denotes little or fluctuating interest among customers. The CES level is helpful in determining the likelihood of prospects and/or new customers returning and demonstrating loyalty behaviors.
Customer Lifetime Value (CLV)
The customer lifetime value indicates how much a brand can expect to earn from a customer during their business relationship. Determining CLV is typically calculated as:
Lifetime Value x Profit Margin
A low CLV may mean customers are not repeating purchases or that they stay onsite only briefly after initial conversion. A high CLV means customers are buying more and staying longer, two sure indications of customer loyalty.
In summary, customer behavior and brand performance metrics can help brands measure customer loyalty. These metrics include Net Promoter Score (NPS), upsell ratio, redemption rate, customer engagement score (CES), and more. By tracking these metrics, teams can identify areas of improvement so brands can nurture loyal customers for a lifetime.
Improve and Build Loyalty With Treasure Data
Treasure Data Customer Data Cloud is an enterprise-grade customer data platform trusted by Fortune 500 and Global 2000 companies around the world to improve customer experience and build loyalty. See what you can do with Treasure Data:
- Collect and centralize customer data from all sources
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- Derive actionable customer insights using machine learning techniques
- Personalize customer experience at all customer journey stages
- Track and improve performance of CX initiatives
- And more
Treasure Data Customer Data Cloud is an integrated suite of cloud-based customer data platform solutions. Treasure Data provides insight by collecting and centralizing customer data, unifying profiles, and analyzing journeys to surface hidden trends in customer behavior.
To learn more about how you can use Treasure Data Customer Data Cloud to help measure customer loyalty, consult an expert today. Want to learn more? Request a demo, call 1.866.899.5386, or contact us for more information.