Updated: Jun 14
Time and time again, we have seen that loyal customers convert friends and family into customers just through word-of-mouth referrals, and they contribute higher revenues to brands they're loyal to. This isn’t mere speculation. Research has shown that it is nearly impossible for brands to break even only off the back of one-time purchases. Costs of customer acquisition are going up rapidly, and loyal customers are like unicorns that everyone chases after.
But, how can you tell if your loyalty program is benefiting you? How can you know for sure that you are actually building a base of loyal customers; and that these people are driving more sales for you?
Enter- loyalty metrics. In this article, we discuss four metrics and what they mean for your retail brand.
1. Net Promoter Score
One of the first metrics that brands need to check when analyzing customer loyalty is the Net Promoter Score (NPS). Introduced in 2001, the metric is an indicator of the likelihood of a customer recommending the brand to another person.
The metric is generally recorded using a single-question survey that asks the customer if they would recommend the brand to another person.
Typically calculated on a scale of one to ten, the metric categorizes customers into three sections, namely – promoters, passives, and detractors.
A promoter is a customer who rates his/her likelihood of recommending the brand to another person 9 or 10;
A passive is someone who rates in 7 or 8; and
A detractor is someone who rates it below 6.
The net promoter is expressed in the form of an integer. Here’s you can calculate it:
First, calculate the sum of all responses recorded by the survey;
Next, calculate the percentage of Detractors and Promoters as per the survey;
Finally, subtract the percentage number of Detractors from the percentage number of Promoters.
The difference between the percentage of Promoters and Detractors is the Net Promoter Score of a brand. A positive integer indicates a healthy score, while a negative integer indicates lower customer loyalty.
2. Customer Lifetime Value
The amount of money a customer spends on a brand is a great measure of loyalty. This is referred to as the customer lifetime value or CLV. The goal of the CLV metric is to calculate the value that a customer can add to the brand over the entire course of his or her relationship with the company. A higher CLV indicates that a customer is willing to spend more on the brand throughout the relationship indicating higher loyalty.
CLV is calculated using other metrics that help record customer behavior for a brand. Here are the fundamental metrics that help calculate the CLV:
Average Purchase Value (APV)
This is calculated by dividing the total revenue for the brand by the total number of orders received.
Average Purchase Frequency Rate (APFR)
This is calculated by dividing the total number of purchases made by the total number of unique customers who made those purchases.
Customer Value (CV)
This is calculated by dividing the average purchase value by the average purchase frequency rate.
Average Customer Lifespan (ACL)
This is calculated by dividing the complete sum of customer lifespan for the brand by the total number of unique customers.
Once these metrics are recorded, brands calculate the CLV using the following formula:
Therefore, the CLV is the product of the CV and ACL.
3. Customer Engagement Score
A customer engagement score or CES is a metric used to predict churn and the probability of customers dropping off. The metric helps brands understand how different customers interact with the brand relative to others. It is used to understand their likelihood of continuing with the brand, purchasing other or more products, or upgrading.
Unlike other metrics, the CES is not as straightforward to calculate. Customer engagement can be measured using the following metrics and running a comparative analysis of multiple sources of information to understand user behavior:
Frequency of purchase of products;
Features that customers throughout the purchase process;
Patterns of customers as theory navigate the online store of the brand;
Successful upsells and cross-sells to a customer; and
Instances of the customer contacting the brand for support.
When calculating CES, brands must specify the value of a particular event that it measures. For example, a brand might give more importance to the upselling of customers than cross-selling. Therefore, comparatively, a customer with a higher cart value per order would be more valuable to the brand and, thus, considered loyal.
Upon assignment of weight to each event, the brand can calculate its CES on a preferred scale by summing up the products of all events and their frequency.
4. Customer Retention Rate
Customer retention is arguably the most relevant metric to assess customer loyalty. It is a measure of the number of customers that maintain their relationship with the brand over a specific period. The CRR can be calculated for any period by assessing the total customers at the start of the time frame, the total at the end, customers that ended their relationship, and the number of new customers that the brand gained.
The customer retention rate is represented in the form of a percentage figure, that determines the number of customers that were still engaged and adding value to the brand after a particular period had passed.
The CRR requires the brand to first identify the time frame for which it wishes to know the retention rate. After the time frame is decided, the brand needs to record the following data:
The total number of customers at the start of the period;
The total number of customers at the end of the period;
The total number of customers that ended their relationship with the brand; and
The total number of new customers that the brand acquired during the period.
The CRR is measured as the percentage of old customers that remained with the brand after the period ended. It can be calculated as such:
The amount of data that brands receive in this digital age is helping them improve their efficiency and deploy effective strategies to reach the right audiences. However, it is important that you understand the value of metrics and how they can help you understand your brand’s performance and shape it better.