Let’s start the conversation by stating this simple fact: There is no standard industry metric used to define a loyal customer. Traditional loyalty metrics are deeply rooted in finance. The most loyal customers are those who keep returning to do business with you, and ultimately spend more money. This dynamic has changed in recent years due to the digital landscape. We are now faced with other layers of data that add to the loyalty equation. Engagement, advocacy, reviews – there are many ways we can measure how loyal a customer is to a brand or product.
One of the biggest benefits in measuring loyalty is developing a deeper understanding of your customers. When developing marketing plans and strategies, it’s critical to understand who your high value customers are. Loyalty measures allow marketers a framework for targeting high value customers as well as a way of understanding where opportunities lie for other customers on the spectrum of their life cycle.
Loyalty is not one dimensional
One mistake people often make is assuming there is one or two clear metrics that define loyalty. Marketers need to use more to really understand loyalty. I prefer to think of loyalty as a multi-dimensional model. One that not only accounts for revenue, but also takes into account other factors like: frequency, engagement, and advocacy. Below is an example of a mental model I use to measure loyalty.
In this mental model, I am looking at four essential dimensions of loyalty, each with it’s own unique measurements and classifications.
1. Strength of loyalty
The first dimension is what I refer to as strength of loyalty, and it measures the frequency of customer purchases. In this model I break down the measure into three categories: new customers (1 purchase), returning (2 purchases), and loyal customers (3 or more purchases). If these categories look familiar, it’s the same approach Adobe uses in SiteCatalyst. You may want to alter the bands to suit your needs, but the main point is to develop a way of classifying frequent purchasing behavior into categories that make sense to your business.
2. Lifetime spend
The second dimension measures the monetary spend of a customer over the lifetime of their relationship with the business. The low end of the spectrum would be the average order value of a single purchase or perhaps the lower quartile of average order value, the middle would be the median value of a customer’s spend, and the high end would be the upper quartile of customer spend. At this point you could create a grid based on the two dimensions knowing who spends the most and who purchases most frequently. I want to take the model a step further by adding digital metrics that increase customer understanding.
The third dimension is customer advocacy. According to a recent MarketingSherpa case study, one company increased customer referrals by 700% through an advocacy strategy. Additionally, a Nielson survey indicates that 84% of consumers view word of mouth as the most trustworthy source of product information. In this model I am keeping it simple and breaking down advocacy into a simple yes or no. The actual measure would be the customers who are sharing content through social digital channels like social sharing or refer-a-friend in email.
The last dimension in the model is engagement. There are a variety of ways someone could measure engagement, but in this example I want to keep it as simple and easy as possible to create useful measures. For the sake of simplicity, let’s use email data as the engagement measure. At the low end of would be customers who are not emailable, either because they have opted out or there is no valid email address. In the middle would be customers who are “occasionally” engaged, which would consist of opening 25% or less of the emails they are sent. At the high end would be people frequently engaged, and open more than 25% of the emails they receive. Understanding this engagement measure adds value, as we can now understand who are the most receptive people to communications.
You have a loyalty measurement model, now what?
Now that you have working measures and a framework that allows you to plot where customers are within the model, you can develop strategies to move them along the customer journey. In addition, you can start identifying the segments that provide the greatest value not only from a monetary model, but from a richer model that allows you to understand marketing engagement and advocacy as well.