“Business must be run at a profit, else it will die. But when anyone tries to run a business solely for profit… then the business must die as well, for it no longer has a reason for existence.” – Henry Ford
Think back to the last time you needed to buy a computer. If you’re an Apple user, there’s a good chance you’ll consider them again. You’ve had a good experience with them in the past. You consider them easy to use, their customer service is great and the computers last a long time. Even if they are slightly more expensive than the competition – you’ll probably head directly to the Apple store for your replacement computer.
That’s because you are loyal to Apple. And you aren’t alone. Brand Keys recognized Apple as “the best representative of customer loyalty and enjoyment in laptop computers, tablets, smartphones and online music” in their 2017 Customer Loyalty Engagement Index. In fact, 87% of Apple’s customers are brand loyal – meaning they will continue to purchase from Apple in the future.
Apple invests heavily in developing customer loyalty. They want to make sure their customers continue shopping with them across their entire product line. Why does Apple feel so strongly about customer loyalty? Read on to find out why the importance of customer loyalty is crucial for businesses growth in 2018.
What is customer loyalty?
Customer loyalty is the act of choosing one company’s products and services consistently over their competitors. When a customer is loyal to one company, they aren’t easily swayed by price or availability. They would rather pay more and ensure the same quality service and product they know and love.
Customer loyalty is the result of a company consistently meeting and exceeding customer expectations. Customers that trust the companies they do business with will be more likely to purchase again in the future.
Why is customer loyalty important?
The importance of customer loyalty impacts almost every metric important to running a business. Without happy customers that continue to buy from you, the business won’t survive. New customers (as we’ll talk about below) tend to cost more to acquire, and don’t spend as much money as loyal, repeat customers. Keeping customers coming back for more is critical to business success. And it’s why short term profit grabs don’t work. Loyal customers are just better for business: they help you grow and they keep profits high.
Stronger customer loyalty helps companies grow
While it’s obvious that customers who come back to spend more money is good for business, there’s other, more subtle, benefits to loyal customers.
It’s like the old leaky bucket metaphor. Imagine a business as a bucket. Customers flow in and fill the bucket up. A successful business has a full bucket of customers (and profits).
However, imagine the bucket has a hole in it. Customers who flowed into the bucket start to leak out the hole. Losing customers is called churn, and it has a large effect on business growth. Even if you can somehow start filling the bucket faster, you’re still losing valuable customers. Patching up the hole (or improving customer retention) means keeping more customers in the business bucket. A 5% increase in customer retention increases business profits by 25%-95%.
Customer churn is not the only force acting on the bucket
If it cost the same amount to replenish the customers lost through the leak, then churn wouldn’t be such a big deal. Unfortunately, it’s much more expensive to get new customers into the bucket than continue to sell to existing customers. It’s estimated that new customers cost five times more to convert than existing customers (Forrester).
This means businesses with disloyal customers need to spend more of their resources on acquiring new customers. Loyal customers make it easier for businesses to grow.
Finally, loyal customers also make recommendations to family and friends. When considering if referrals are really all that important to your bottom line, consider the following stats from Referral Sasquatch:
- Lifetime Value for new referral customer is 16% higher than non-referrals. This is likely because they already have a positive opinion on the business, and friends are more likely to recommend “perfect fit customers” or those that they know will benefit from your product or service.
- 84% of B2B decision makers start the buying process with a referral. Loyal customers can help expand your lead pipeline.
- Companies with formalized referral programs experience 86% more revenue growth over the past two years when compared to the rest.
Investing in company loyalty isn’t just about preventing customers from leaving. It’s also about maximizing the opportunity for growth. Combine all these loyalty effects together, and it’s estimated that customer disloyalty can stunt growth by 25%- 50%. Yikes.
Customer Loyalty means Higher Profits
To operate a business revenue must be greater than expenses. If it takes $100 to convert a potential customer to a buyer, they need to spend at least that much with your business for you to break even. Customer Acquisition Cost (CAC) will often include items like marketing spend, sales labour and software cost. All those costs add up: Bain & Company believe that most businesses need to retain customers for at least 12 to 18 months to break even on cost of acquisition. The importance of customer loyalty isn’t just a nice idea, it’s necessary to keeping the business afloat.
In fact, directing resources towards improving customer loyalty is one of the best investments a business can make. A 2% increase in customer retention has the same effect on profit as decreasing operating costs by 10% (Leading on the Edge of Chaos, Emmet Murphy & Mark Murphy.) Instead of spending less money on customers, spend money on keeping customers around – the payoffs are worth it!
As a final point, repeat customers are often the most profitable. McKinsey found that repeat e-commerce customers spend more than double what new customers spend ($52.50 average cart size for repeat customers, compared to $24.50 for new customers). SaaS businesses can see a similar benefit by upselling existing customers and providing more value as the account grows.
A focus on customer loyalty results in higher profits and overall company success.
How do you measure customer loyalty?
Customer loyalty is measured by examining customer behavior. Loyal customers will make more purchases, stay customers for longer and refer their friends and family. All of these behaviors can easily be measured.
A customer isn’t either loyal or disloyal. There’s a loyalty spectrum. Customers can be a little bit loyal or extremely loyal. Using the metrics below will help identify how loyal customers are, and where more work needs to be done.
Lifetime Value (LTV)
Loyal customers will spend more money with you over time. This is easily measurable. Lifetime Value is the amount of money customers spend with you from their first purchase to their latest purchase (or cancellation). Many subscription payment platforms will automatically provide this metric. Increasing average LTV is an excellent lagging indicator for customer loyalty (ie. as customer loyalty increases, LTV will also increase).
Note that LTV also depends on the cost of different products or services. An Enterprise customer who cancels after a year might have a higher LTV than a 5 year Starter customer.
In addition to measuring the customers who stay, it’s also important to look at the customers who go. Disloyal customers who cancel offer a great source of learning.
From the Baremetric’s SaaS academy article on measuring churn:
“There is more than one way to measure your churn. The most straightforward way is to calculate the percentage of users lost based on the number of users you started with in a given time period. Do this by dividing the number of users you churned by the number you started with. That percentage will allow you to estimate how many users you may lose on a monthly or quarterly basis.
However, you may also calculate your churn in terms of potential revenue lost. Each time you lose a user and their subscription, you are losing a certain amount of revenue. This is called revenue churn, and it is arguably more important than user churn. This metric is important to track because it weights your user churn in a way that more accurately represents how your business is doing.”
If you run a referral program, it’s possible to track the number of new customers who sign up based on word of mouth. Loyal customers are happy to share great services with friends and family. Measuring referrals tracks not just customers who stick around, but also customers who are so happy they spread the word.
For example, Dropbox offers free storage to users that refer new customers. When a customer signs up through a referral link, Dropbox can attribute their future payments to referrals. As customers become power users, they will be more likely to refer family and friends to gain more storage space. Dropbox grew 3900% in 15 months using this referral strategy.
It’s also possible to track referrals as a lead source within Salesforce or other CRMs, even manually. As customers become more loyal (and your referral program becomes more structured) you’ll see referrals become a large percentage of total incoming leads. People are talking about you!
Net Promoter Score
While NPS is often considered The Ultimate Question when measuring the importance of customer loyalty, it can be a somewhat misleading metric. Why? Because NPS only measures customer’s intent to recommend the company. It doesn’t measure action. The customer might be disloyal for other reasons in the future – perhaps they are extremely price sensitive or they have a bad service experience. Just because a customer signals they might recommend a company, doesn’t mean they will follow through.
However, NPS is still very useful for looking at overall loyalty trends in the user base, and for uncovering Promoters that might be helpful in the future. NPS could be considered a “leading indicator” of loyalty.
Six Stages of Customer Loyalty
Customer loyalty can also be measured by the level of commitment each customer shows to the company. There are six stages in customer loyalty, and each stage increases in the amount of loyalty the customer shows. For example, a customer who is a repeat purchaser is more loyal than the customer who buys for the first time. A customer who refers a friend is more loyal than the customer who simply buys once and uses the product.
The six stages of customer loyalty are:
- Awareness – customer is aware of company and what it offers
- Research – customer is considering purchasing, and has visited website, downloaded resources, etc.
- Buy – customer has bought product or service
- Use – customer uses the service that they purchased
- Repeat – customer purchases from company again
- Refer – customer refers friends or family members to company
The goal of any company is to move the customer from stage one (awareness) all the way through to stage six (repeat buyer and referrer).
The effect of great customer service on customer loyalty
Can the customer service team play a big part in driving customer loyalty? Absolutely. Customers love doing business with companies who offer great service. A recent Harris Interactive survey discovered that customers would pay more if they could guarantee superior service. That means that companies with great customer service will see stronger customer loyalty, and lose fewer customers solely to price competition.
Customer service teams also have a big part to play in preventing disloyalty. In that same Harris Interactive survey, eighty-nine percent of respondents who had recently switched from a business to its competitor did so because of poor service. We talk often about how high effort experiences can cause customers to become disloyal. Customer service teams that measure customer effort score can have a big impact on reducing friction and increasing customer loyalty.
While satisfaction may not necessarily result in loyal customers, dissatisfaction almost certainly leads to disloyalty.
The Future of Customer Loyalty
We used to rely on proximity to keep customers coming back. Most people would shop at the local corner store, get a savings account at the local bank and book their annual holiday at the travel agent next door. We were loyal to local businesses because we knew the owner from soccer practice.
Today, 85% of shoppers start their search on Google, instead of at the local shopping center. Simply by typing in a description of what they want to buy, customers can compare prices across every online business. One click, and they can get it delivered the next day. Customer loyalty is decreasing as competition is increasing.
In order to attract customers, and keep them coming back, companies need to invest in building company loyalty. By meeting and exceeding expectations consistently, companies can start to build a relationship with customers.
Competing simply on price is a race to the bottom. Companies with zero customer loyalty are forced to play this game, offering deeper and deeper discounts to attract new customers. But companies who have loyal customers don’t need to compete on price.
Instead, they can leverage their strong relationship with customers to keep them coming back.