Measuring Customer Loyalty – Getting it Right

May 26th at 1:22pm by Susan Levermann

A balmy summer evening is just perfect for catching up with friends. Relaxing on the terrace lets you unwind and immerse yourself in deep conversations. Thirst sends you into the kitchen on numerous errands and here various shiny household appliances - all from one brand - really stand out. Someone seems to be a real fan here.

Finally! Today, the new iPhone will be released and long queues are forming in front of Apple stores. It's not been a year since the last one came out. Why are many so obsessed with owning everything from the brand with the distinctive fruit logo?

Two situations with the same thing in common – a deep bond with a particular brand, also known as Customer Loyalty. But such a deep connection is rare these days. After all, the market for products and services is so crowded that interested parties are usually spoilt for choice. It is simply no longer enough to lure customers in with a low price. In order to retain customers over the long term, a sophisticated strategy and willingness to fully engage with people and their needs is required. There is always a keyword: retention! It’s the be-all and end-all that every business aspires to. Customer Retention promises loyal customers, brand loyalty and thus profit as well as an economic advantage over the competition.

A promising concept is planned, implemented in detail and then... well, what happens then? Success must somehow be made visible. This is achieved by measuring Customer Loyalty. Appropriate strategies and tools help - but in order to use them successfully, one should first deal with the term in detail.

What is Customer Loyalty?

Customer Loyalty is an important part of Customer Relationship Management (CRM), and is therefore a key responsibility of the marketing department. The term describes how appropriate measures tie customers to a company or brand. In other words, their loyalty belongs to this brand. This is demonstrated by intensive repurchases and expresses itself on two levels: the emotional and behavioral. Both need to be addressed in order to holistically strengthen the bond of buyers.

In the past Customer Satisfaction was considered fundamental. It refers to the level of satisfaction a buyer has towards the purchased product or service and is based on past expectations. If their expectations have been met or exceeded, Customer Satisfaction is either very high or very positive. If their expectations are not met or there is a bad experience, satisfaction decreases accordingly. This shows that Customer Satisfaction is a subjective individual perception. It was therefore assumed that a high level of Customer Satisfaction leads to firm Customer Loyalty. However, this is too short-sighted. Nowadays, marketing increasingly assumes that satisfaction together with Customer Loyalty leads to company success.

The background to the paradigm shift is the assumption that subjective Customer Satisfaction influences the emotional level of Customer Loyalty and that this in turn influences the behavioral level.

Customer Loyalty and Customer Retention are often used as synonyms. The terms are fundamentally different: Customer Retention is the business, while loyalty is what the customer gives. A bond can also be achieved by a certain degree of pressure and negative factors, such as the so-called gag contracts. Loyalty, on the other hand, is based on positive experiences with the respective brand, is forward-looking and thus refers to the intention to make new purchases from a particular company or brand.

Thus, while Customer Satisfaction is important, many more factors play a role. These include, for example, performance, habit, image as well as the company’s understanding of the market.

These 6 Factors affect Customer Loyalty

Entrepreneurs must not make the mistake of not caring about their regular customers. It is precisely these that need to be looked after in order to ensure long-term business success.

Here is an important point that entrepreneurs need to consider: many buyers have internalized that showing loyalty results in punishment. Those who are now vehemently shaking their heads should remember all the discount promotions that are used across industries to attract new customers. This ranges from a bonus when switching electricity providers to the new customer discount on a mobile phone contract. These actions attract new customers – and show existing customers how nonsensical loyalty is when you can only get bonuses by constantly changing your allegiance.

To counter this, a company must take action to show that loyalty is rewarded, whilst keeping in mind that a buyer's bond is based on emotion. Studies show time and again that people turn to brands and companies that address their emotions. This works with fixed values, understanding with the buyer and fulfilling his expectations. In other words, you have to aim at these positive emotions and grab the buyer with a wow effect. This must not remain a one-off action, but should rather include several areas:

  • Offering high-value utility
  • Offering attractive services
  • Building trust
  • Treating customers fairly
  • Being friendly
  • Always offering “wow” moments

There is also the chance to create Customer Loyalty through applying a little pressure or using factors which are unpleasant from the customer's point of view. These include, for example, adding barriers which make it more difficult to terminate a contract. Some shy away from the effort and then stay with the company, despite dissatisfaction. However, these will migrate as soon as a better alternative is offered. Companies should therefore focus more on positive factors. Whoever manages to do this repeatedly confirms the customer's trust in the respective brand as well as the company, and thus strengthens Customer Loyalty again and again.

Why you should measure Customer Loyalty

Studies show that regular customers influence profits significantly more than new customers. It's therefore worth keeping them instead of constantly chasing new buyers. This is simply because, according to one study acquisition costs of a new customer are about 5 to 25 times more than those that contribute to binding existing ones. If, on the other hand, retention rates rise by 5 percent, this will increase profits by 25 to even as much as 95 percent.

That alone should be enough argument for a business to be interested in individual Customer Loyalty. Only when a company can measure loyalty can it understand how well or badly it can retain customers. This information is provided through details on past purchases, but can be deeply meaningful for the future. Using the insights gathered as a basis, marketing can revise, adapt and sharpen customer management and thus the strategy around Customer Retention.

If a company fails to refine its approach to Customer Loyalty, it has to reckon with so-called Customer Churn. This refers to customer loss - it does not matter whether these were regular customers or one-off buyers. As loyal buyers increase a company's sales significantly more than new customers, any successful businesses interest should be in keeping Customer Churn as low as possible.

Keeping churn rates low requires ongoing processes to ensure long-term Customer Loyalty improvements. And, of course, improved Customer Loyalty guarantees rising profits. This measurement serves as the basis for necessary in-company adjustments, allowing growth targets to be achieved and customer loss to be kept as low as possible. Measuring Customer Loyalty is therefore a very important part of the sales forecast.

Good to Know: The Customer Retention Rate

To find out the intensity of Customer Retention rates, one uses the so-called Customer Retention rate. This is the key to finding out if buyers are satisfied. The Customer Retention rate indicates, as a percentage, what proportion of customers have remained loyal over a period of time. On this basis, your services can be improved and tweaked in reference to their effect on the binding rate.

These are all good reasons to devote yourself intensively to Customer Loyalty. Various areas play a major role in this, all of which must be put together into a strategy. This is the only way to implement the concept holistically with the aim of improving Customer Loyalty.

4 Strategies for Measuring Customer Loyalty

To measure Customer Loyalty, there are several options with significant characteristics:

1. Customer Loyalty Rate

The Customer Loyalty rate (CRR) shows how well customers can be satisfied over the long term. To determine this, you first select a specific period, such as a quarter. During this period, the number of existing customers is determined at the beginning (A) and at the end (B) and the number of new customers (C). Then you calculate the CRR:

((B-C)/A) x 100 = CRR in percent

The difference between the final sum and 100 is the percentage rate of emigrated customers.

2. Upselling Ratio

This ratio records how many customers buy more than one product from different product lines, such as a new smartphone and then a laptop. For the calculation you need to know these multiple buyers (A) and the one-time buyers (B):

A/B= Upselling ratio

3. Customer Loyalty Index

The Customer Loyalty Index (CLI) is a standardized way to measure loyalty. Three questions are asked on the basis of a questionnaire:

How likely are you to recommend us to your friends or acquaintances?

How likely are you to buy from us again in the future?

How likely are you to try other of our products/services?

These are answered on a six-stage scale, with 1 for a definitive yes and 6 for a definitive no. The numbers are used to calculate an average that then gives the CLI.

4. Net Promoter Score®

Similar to the CLI, the Net Promoter Score (NPS) works on a scale. Here, however, a single question is enough to get a result. It reads:

How likely is it that you would recommend our company to a colleague or partner?

The answer is based on the scale between 0 and 10. Extremely satisfied customers enter values from 9 to 10 (A), the neutral or passive commutes at 7 and 8 (B). Anything under 6 is one of the critical customers (C) whose probability of churning out is high. The calculation now converts the extremely satisfied and critical customers into percentages. After that, the critical ones are pulled away from the extremely satisfied customers. The calculated number then gives the NPS.

Each company — explicitly the management, marketing, and sales departments — should carefully review the various options and tools, and then choose a method. The main focus should be on the buyer. In other words, he should be able to express his needs in the simplest of ways, because this allows Customer Loyalty measurements to be quickly integrated into the business processes.

NPS: The clear favorite to measure Customer Loyalty

Based on the NPS, customers are specifically asked about their subjective feelings instead of just evaluating sales figures. The emotional component of the relationship with the company can be fully taken into account.

Another advantage of NPS® lies in its simplicity. Regular short surveys collect data far more effectively than long-term customer questionnaires. Customers get a question and possibly an open field to enter comments – that's it! This simple and fast method ensures that more customers respond. Longer surveys and the like are often rejected as too cumbersome and not filled out. If these customers then use the opportunity to put their criticism into words, the results can be evaluated with a holistic NPS. Thanks to rapid evaluations, even negative points can be used positively to further improve Customer Satisfaction.

See You Again Instead of Goodbye

Customer Loyalty is a foundation on which a company should be aligned. The emotions of the customer, together with his satisfaction and the resulting behavior play a major role. The efforts of marketing, sales and management should therefore move in this direction. If the company binds its customers to itself, it may lead to the growth of loyalty to the product and brand.

Satisfied customers show their feelings to public.

To see if the Customer Loyalty strategies are gaining a foothold and arriving at the customer's point of view, it is possible to measure Customer Loyalty. To do this, the company must collect relevant data about its buyers and evaluate them.

Various tools and strategies help measure Customer Satisfaction. The Net Promoter Score® offers a practical and holistic way to address customers directly and learn more about their satisfaction levels. On this basis, one can then proceed further, as retaining Customer Loyalty requires a continuous improvement of the company together with a comprehensive range of services based around the buyer. This is the only way for a company to provide all-round support to its customers throughout every stage of the customer journey - and beyond.


Susan Levermann

Content Marketing Manager