Keep Customers (and Gain More) by Measuring Customer Loyalty

How do you measure customer loyalty? Is it by the number of dog-eared punch cards, or check-ins on Yelp? Or—for the diehards—a tattoo of your logo in exchange for a lifetime discount?

The short answer to these questions is no. But, considering the wide variety of qualitative and quantitative metrics that business leaders use to understand customer loyalty, they aren’t totally off base. And because repeat customers can be more cost-effective than new ones, it makes sense that a business would want to learn as much as possible about retaining its customer base.

If you’re a small-business leader looking to increase retention, lower churn, and improve customer experience at your organization, you’re in the right place to learn about customer loyalty metrics: the ways we measure our ability as business leaders to earn our customers’ business again and again. Read on for six ways to measure customer loyalty at your company.

Also known as customer effort score, customer engagement score (CES) is a metric that measures customers’ perception of how easy it is to handle interactions and achieve issue resolution during service and support requests. By reducing customer effort, service organizations can deliver higher-quality interactions at lower costs. [1]

CES is based on a survey question that asks customers how difficult it was to get their query or complaint resolved: “How hard did you have to work to get a problem fixed, a query answered, or a service rendered?” 

What’s a good CES to aim for?

Gartner [1] recommends that organizations maintain a CES of 5 and above to build customer loyalty, as CES ranges from 1 to 7. Service organizations could consider the average CES of 5 as a benchmark of an average customer whose perceptions of the product or service is enhanceable through value enhancement.

See below for a visual representation of Gartner’s Loyalty Playbook [2], which demonstrates how a low-effort customer experience can help mitigate customer disloyalty.

Your net promoter score, or NPS, helps measure a customer’s satisfaction level by looking at loyalty parameters. It’s calculated based on customer responses to the question, “On a scale of 1 to 10, how likely are you to recommend our product or service to a friend?” 

NPS survey from customer feedback platform Survicate (Source)

Based on responses, you can divide your customers into three groups: 

• Promoters: Customers who responded with a 9 or 10. These are loyal customers who make repeat purchases and refer your brand to friends and family.

• Passives: Customers who responded with a 7 or 8. Though these customers shop with you, they’ll likely move to a competitor if they find a better price, product, or feature.

• Detractors: Customers who selected a rating between 0 and 6. These are unsatisfied customers who’re likely to leave a negative review for your brand.

What’s a good net promoter score to aim for?

Since you’re subtracting percentages, NPS can range from -100 to 100. You’ll want to ensure yours stays above zero: a negative score says you have more detractors than promoters—which means your customers are unhappy. If your NPS is higher than 30, good news! You have far more happy customers than unhappy ones. If your NPS is over 70, things couldn’t be better. Keep up the good work.

Your repurchase ratio (also known as repurchase rate or repeat purchase rate) calculates the percentage of customers who came back to buy from you again within a certain timeframe (usually a year) after their first purchase. This helps you understand a few different things:

• The success of your marketing and retention efforts.

• The rate at which customers consume your product, or need your service again.

• Whether your product or service is a good fit for your target customer.

• How much customers like and value your product or service.

What’s a good repurchase ratio to aim for?

eCommerce industry experts [3] say your repurchase ratio should be between 20-40%. But this will vary depending on how long a business has been around and what it’s selling. Established businesses will see higher repurchase ratios than just-launched ones. Likewise, a business selling highly consumable products, such as food or personal care products, will have a higher repurchase ratio than one selling long-lasting products such as cookware or furniture. [4]

Customer lifetime value, abbreviated as either CLV, LTV, or CLTV, is the average revenue brought in by a customer relationship over a lifetime. A repeat customer who makes multiple purchases from your business over their customer lifespan, or the total number of years that they purchase from you, will have a higher customer CLV than a one-time customer. 

You can find out your business’s average CLV by determining the following variables, which we’ve defined for you below:

What’s a good customer lifetime value to aim for?

To be able to determine what CLV is good for your business, you need to calculate your customer acquisition cost, or CAC. See below for a quick tutorial:

A CLV to CAC ratio of 3:1 is ideal because it means you’re making three times what you paid to acquire customers. A 1:1 ratio means that the cost to acquire new customers is the same as those customers’ CLV, which would result in a loss, since CAC only takes marketing and sales expenses into account and not what you’re spending on parts, labor, shipping, and handling.

If your CLV is lower than your CAC, that means your business is spending more to acquire customers than it stands to make from those same customers. While a ratio that is higher than 3:1 seems like a good thing, it might mean there’s more you could be doing to bring in customers. 

Customer loyalty index, or CLI, helps you track customer loyalty over time. Customers take a survey that gauges NPS, repurchases, and upselling all in one.

The three questions that make up the CLI survey are as follows:

• How likely are you to recommend [your business name] to a friend?

• How likely are you to buy from [your business name] again?

• How likely are you to try [your business name]’s other products or services?

Customers will answer on a scale of 1 to 6, where 1 means “very likely” and 6 means “not likely.” 

What’s a good customer loyalty index score to aim for?

In the case of CLI, a lower score is preferable. Aim for around 2.

Did you know that your business doesn’t need a customer loyalty program to measure customer loyalty? In fact, Gartner [5] recommends against relying on a loyalty program as your only metric for customer loyalty, and instead suggests combining a program with other metrics for your truest sense of how your customers are feeling.

A loyalty program does provide you with a few other metrics that you can use to measure customer loyalty, such as loyalty program participation rate, which measures how many of your customers are part of your loyalty program. 

What’s a good loyalty program participation rate to aim for?

If a quarter of your total customers are participating in your loyalty program, you can consider it a success, as 23% is about the average loyalty program participation rate across industries. [6]

Whichever metrics you decide to measure, it’s important that your entire team understands what KPIs you’re working toward, and what improvements need to be made to increase customer loyalty. It’s also important that you train team members on the software you adopt to more effectively measure customer loyalty. 

Head over here for more resources on customer management for your small business.