Loyal customers are those who consistently and repeatedly buy products or services from you, rather than rival brands. They’re reluctant to switch to competitors, even if they can offer more competitive pricing.
It’s not easy to build customer loyalty. You need to give your customers such a good experience that they don’t even consider shopping around.
But if you get it right, the investment is worth every penny. Here’s why customer loyalty is so important.
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Higher order values, low-cost acquisition, predictable revenue: 10 reasons why customer loyalty is important
1. Loyal customers have a much higher lifetime value (CLV) — and better retention means higher revenue
If you can retain your customers and keep them loyal to your brand, they’ll buy more often and spend more than they do, so revenues will be higher. And you won’t need to spend as much on getting new customers, so your profits will go up, too.
Bain & Co. estimate that increasing customer retention by just 2% can have the same impact as cutting costs by 10%. They also found that improving customer retention by 5% can increase profits by up to 95%.
This is because a small number of your customers will contribute a disproportionately large amount of revenue: 80% of a retailer’s business comes from 20% of its customers.
And yet nearly 80% of companies spend less than 30% of their time and budget on customer retention-focused messaging. So a retention-focused marketing strategy can still give you a competitive edge.
2. Average order values — and therefore revenues — tend to be higher
Loyal customers are more likely to make repeat purchases, contributing significantly to your revenue over time. They often purchase more frequently and are open to trying new offerings, providing a steady income stream that’s less volatile and more predictable than that of new customers.
A study by Bain & Company found that the top 10% of customers of a business order 3x more per order than the rest. The top 1% of customers order 5x more than the rest. And after 30 months of loyalty, customers spend 67% more than their first purchase.
3. Loyal customers recommend you to friends, which makes it cheaper to get new customers
Retaining an existing customer is generally much cheaper than acquiring a new one. The marketing and operational costs associated with attracting new customers are significantly higher than those for maintaining relationships with current ones.
4. Loyal customers are an excellent data source
Loyal customers provide valuable feedback. They are more invested in your products or services and are often willing to provide insights and suggestions that can help you improve and innovate, driving your business forward.
5. You don’t have to rely so heavily on price
Loyal customers are less price sensitive, so you can avoid the race-to-the-bottom with price so often associated with ecommerce.
Instead, you can offer other benefits: personalized offers, better delivery, exclusive rewards. And if the rewards are compelling, your best customers will be willing to spend a little more to unlock them.
6. Loyal customers tend to buy more regularly, which can even out seasonal fluctuations in revenue
Loyal customers offer a more predictable revenue stream. With a good understanding of their purchasing habits, you can forecast sales more accurately, plan inventory more effectively, and make informed strategic decisions.
Customers who are subscribed to a loyalty program have a 37% higher purchase frequency than those who aren’t.
7. During economic downturns, loyal customers are more likely to keep spending
During economic downturns or periods of market uncertainty, loyal customers provide a safety net. They help stabilize revenue and provide the cash flow needed to navigate through tough times.
8. Loyal customers are more likely to leave positive reviews, which is great for your reputation
A loyal customer base enhances your brand’s reputation. Positive reviews and high customer satisfaction scores elevate your brand’s status, making it more attractive to potential customers and partners.
9. Your most loyal customers tend to be more receptive to up-selling and cross-selling
Loyal customers are more open to upselling and cross-selling. They trust your brand and are more likely to respond positively to offers for higher-tier products or additional services.
Constellation Research found that companies who improve engagement can boost the revenue they get from cross-selling by 22%. Other benefits can include growth in upsell revenue (from 13% to 51%) and an increase in order size (from 5% to 85%).
10. If you move into new markets, you’ll have an existing base of trusting customers to help you get established
Having a loyal customer base provides a solid foundation when expanding into new markets. These customers can be the first to try and promote new offerings, providing the initial momentum needed to establish a presence and start building a new customer base in uncharted territories.
Consider, for example, how Amazon built a loyal customer base through Prime’s premium delivery options before moving into the streaming space. They were able to build up their market share quickly by giving their Prime members access.
KPIs – how to track customer loyalty
Repeat purchase rate
The repeat purchase rate is the percentage of buyers who have made a first purchase and then a second (or more) in a given time. It tells you what proportion of your customer base is coming back for more.
The formula is [return customers] / [total customers] x 100.
Average order value (AOV)
Average order value (AOV) tells you how much customers typically spend when they buy from you. Loyal customers tend to have a higher AOV.
The formula is [total revenue] / [number of purchases].
Cost of acquiring a customer (CAC)
Cost of acquiring a customer (CAC) tells you how much you have to spend, on average, to bring in a new customer. You can compare it with customer lifetime value (CLV) to figure out how profitable your customers are.
Loyal customers often recommend you to other customers, which is an extremely cost-effective form of customer acquisition. So, as you build customer loyalty, you should see a drop-off in CAC.
The formula is [total spend on marketing] / [number of new customers].
Customer lifetime value (CLV)
Customer lifetime value (CLV) projects the total monetary value of a given customer.
If CLV is higher than the cost of acquiring a customer, you’re making a profit.
Loyal customers — who make more purchases and spend more per purchase — tend to have a higher CLV than non-loyal customers.
To calculate CLV, you need to first multiply average purchase value — total customer spend divided by number of purchases in a given year — and multiply that by average purchase frequency — number of purchases divided by number of customers.
This is your average customer value. You can then multiply this by the average customer lifespan — the amount of time, on average, a customer purchases from you — and you have a CLV figure.
So, if your average customer spends $20 per purchase, and makes an average of four purchases per year, your average customer value is $80. If your average customer buys from you for five years in a row, your CLV is $400.
A low CLV suggests your customers aren’t very loyal.
How to secure customer loyalty
1. Prioritize customer service: Satisfactory customer service plays a significant role in getting customers to come back. 93% of consumers are more likely to make repeat purchases at companies with excellent customer service.
2. Reward loyalty: A well-designed loyalty program can make a huge difference to revenues and profits. 26% of shoppers are more likely to shop repeatedly with a brand that offers a loyalty program.
They spend more, too — up to 40% more than customers who aren’t loyal program members, on average.
A good loyalty program will net you new customers, too. Over 70% of consumers are more likely to recommend a brand if it has a good loyalty program.
3. Get emotional: Beyond the nuts-and-bolts of competitive pricing and top-notch customer service, try to build an emotional connection with your customers — that is, one built on shared values. A study by Motista found that customers who claim an “emotional connection” to a brand have, on average, a 306% higher CLV.
4. Encourage and act on feedback: Collect quantitative insights through your analytics platforms and CRM, but remember that qualitative feedback adds nuance and context. Use this context to fine-tune your offering, and your customers will reward you.
5. Personalize your offering: Personalization is a powerful tool in securing customer loyalty. 80% of consumers are more likely to make a purchase from a brand that provides personalized experiences, and 70% say they would be loyal to a brand if they got personalized offers.
5. Focus on lapsed customers: It’s tempting to focus all your efforts on getting the most out of your already loyal customers, but there’s a lot of value in reaching those customers who could become loyal with the right approach. Segment your customer data and find those cohorts whose spending has dropped off recently, and target them with re-engagement emails. These emails perform 14x better than average.
Loyalty programs create loyal customers by rewarding repeat purchases — and other high-value behaviors
A loyalty program is a long-term marketing tool used by ecommerce merchants. The goal is to encourage people to buy from you again. The method? By offering rewards to those who show loyal purchasing behaviors. When we say rewards, these can include discounts, special offers, deals and freebies.
It’s not all about rewarding shoppers, however. It’s also about increasing the lifetime value of that customer to your business. It can also drive up their average order value and purchase frequency.
You can reward loyalty for small actions such as social media likes or completing a profile page. Or scale it up with rewards for how much a shopper spends, the number of qualifying sales and even how much they’re prepared to spread the word. In time, they get real-world rewards. You, meanwhile, get an engaged consumer.
Use your loyalty program to recognize the importance of customer loyalty and make it work for your brand.
For more information, get in touch to book a demo with one of our experts.