Why is customer loyalty important?

Put simply, customer loyalty describes how willing your users are to come back to you after their first purchase. It's about ensuring that their experience with your brand and product is good enough that they'll be happy to choose you again and reward you with their repeat business. Loyal customers are those who continue to choose you each time they need your product or service.

The difference between customer loyalty and brand loyalty

Customer loyalty is closely related to brand loyalty, but the two differ in a couple of important ways.

Customer loyalty is largely focused on the experience your audience has with a specific product of yours, including price, user experience (UX), and the ability to satisfy their needs. Brand loyalty is about connecting that experience with deeper-lying values and perceptions in a broader sense.

Customer loyalty can lead to broader brand loyalty over time but tends to have a more immediate focus.

What is loyalty marketing?

Loyalty marketing is a strategic approach to promotion that prioritizes loyal customers. It treats the conversion from potential customer to customer as a starting point, not an endpoint.

KPIs for loyalty marketing tend to be how long a customer stays with the company, how much revenue they generate over time, and how likely they would be to recommend the business or its products to their peers.

Improving your customer loyalty is as important as gaining new customers. It's the other half of the revenue equation; keeping your customers happy means they'll continue to come back and generate revenue, sustaining your business in the process.

In addition, the cost of retaining an existing customer tends to be significantly lower than attracting a new one. You no longer need to educate them about your brand and product basics. Instead, all your marketing can focus on reminding them of their positive experience and pushing them to buy again at the right time.

Beyond the additional revenue and lower acquisition costs, increasing customer loyalty matters because it has three major effects:

• Turning customers into brand champions. Happy customers are more likely to talk about the products that make them happy. That valuable word-of-mouth can go a long way toward increasing awareness and building credibility in the marketplace.

• Increasing your customer share-of-wallet. Think of share-of-wallet as market share, defined by an individual customer's spending. A higher share-of-wallet means they spend a higher share of their budget on you than your competitors, positioning you well, especially in competitive shares.

• Improving your customer lifetime value (CLV). More loyal customers are worth more to your business in the long run. Measuring and improving your CLV allows you to spend more elsewhere, from unlocking new markets to improving your products.

There's a reason companies in every industry prioritize customer loyalty. The benefits, from increased revenues to improved marketing efforts, are too significant to ignore.

Learn more about customer analysis software

Not every customer is created equal. So it shouldn't come as a surprise that not every customer returns to a business to buy again for the same reason. The five most common types of loyal customers are:

• Happy customers. They've tried your products, and like them enough to give them a positive review. When the need arises again, they'll come back—unless a competitor offers a better alternative.

• Price-loyal customers. They come back only because you have the lowest price available on the market. But if someone else undercuts you, a price-loyal customer will take their business in that direction instead.

• Convenience-loyal customers. They love you because something about your product is more convenient than your competition. It might be the shipping time, app compatibility, or your physical location.

• Loyalty-program loyal customers. They enjoy your rewards program so much that they want to keep going. For example, they might retain a subscription for 10 months because they know the last two months of the year will be free if they do.

• Freebie-loyal customers. Closely related to loyalty-program loyal customers, they love you because of the extras you offer. For example, they might buy from you again because their first order included a coupon or free promotional item for their next order.

Of course, you will also have some truly loyal customers who love your products so much, they'll never go anywhere else. It's the final stage of customer loyalty and the place where it begins to blend with brand loyalty. These are your brand champions, the holy grail of customer retention and loyalty.

Customer retention describes the rate at which new customers stay with your business and add to your revenue over a given period. If, for example, 20% of your new customers buy from you again within one year, your retention rate for that year is 20%. Note, for less-often-purchased products, the period for repurchase may be extended e.g. for vehicle or home appliance categories.

The two concepts are not identical, but customer retention is directly related to customer loyalty. More loyal customers are more likely to stay with your business, increasing your retention rate. But while retention is quantifiable by the specific number of repurchases in a specific period, loyalty is a more abstract concept that isn't restricted to the same time frame.

Especially compared to more specific metrics like customer retention, customer loyalty can be difficult to measure. It's about measuring your customers' willingness to come back to you, not necessarily their actions. These five metrics can help you approximate loyalty, for both individual customers and broader segments of your target audience.

1. Repeat Purchase Rate (RPR)

The close connection between customer loyalty and retention rate means that one metric can begin to track both. That metric is the rate of your purchases coming from customers who have purchased from you before.

This is an especially valuable metric to track over time. For example, you might find at the beginning of your business that only 5% of your purchases come from repeat customers. Over time, that rate may rise to 10%, 15%, and above, indicating growing loyalty among your customer base.

2. Net Promoter Score (NPS)

NPS is based on a simple question: "On a scale of 1 to 10, how likely would you be to recommend [business name] to others?" The answers will fit into one of three categories:

1. Detractors: people who answer anywhere between 1 and 6. They're unhappy with their product or experience and might become a danger to your reputation if they discuss their experience with others.

2. Passives: people who answer with a 7 or 8. They won't hurt your brand or reputation, but likely also won't be very loyal or help through positive word-of-mouth.

3. Promoters: people who answer with a 9 or 10. They loved their experience and are likely to talk about it to others. They're probably fairly loyal to your products and can become brand champions as well.

Subtract your percentage of detractors from the percentage of promoters, and you have your NPS. Broadly, it allows you to measure customer loyalty and how it might change over time. Narrowly, you can follow up with detractors and passives to discuss their experience and hopefully nudge them in the right direction.

3. Engagement with your brand

Loyal customers become more loyal to engage with you. They're more likely to visit your website, comment on social media posts, and leave product reviews. The more enthusiastic they become, the more likely they'll be to build a connection to your business that ultimately results in repeat purchases.

Brand engagement can be fickle to measure because it can happen on any channel. But it's still a valuable piece of the equation. If you can even approximate the rate at which different customers and segments engage with your brand, you can approximate their degree of loyalty as a result.

4. Multiple product purchases

Customers have a higher chance of loyalty if they branch out beyond the product they initially bought. It shows a level of confidence that their experience with your first product was good enough to assume other products of yours will have the same effect.

Measuring the rate at which customers purchase multiple products is a leading indicator of customer loyalty, but it can also indicate brand loyalty. If their trust in your business is high enough, and their values overlap with yours, you'll become a go-to resource not just for one product, but others related to it.

5. Customer Loyalty Index (CLI)

Perhaps the most complex metric to measure your customer loyalty is the CLI, which like NPS measures loyalty as a result of a specific type of customer survey. That survey has three questions, answered on a scale of 1 to 6:

1. How likely are you to recommend [business name] to a friend?

2. How likely are you to buy from [business name] again?

3. How likely are you to try [business name]'s other products or services?

The average of all three answers becomes the CLI. Measure it over time, and you'll get an idea of customer loyalty. Keep in mind, of course, that the answers are based solely on survey responses, so they might not overlap entirely with purchase-based metrics like those above.

A SWOT analysis can help you create customer loyalty by analyzing your current customers from four core perspectives:

• Internal strengths

• Internal weaknesses

• External opportunities

• External threats

Each of these factors can help you understand why your customers are (or are not) loyal to your products. The analysis forces you to think beyond assumptions, creating a fuller picture of your audience's mindset as they consider what products in your category they should buy.

SWOT analysis template

Building customer loyalty doesn't happen overnight. It requires a philosophy that shows customers you care, from strong loyalty programs to a special community for existing customers.

It also helps to think about your business evolution: what other products can you offer that naturally enhance your customer experience and encourage loyalty?

More specifically, these six strategies can help you improve loyalty and retention in both B2C and B2B environments.

1. Understand your customers

To create a great experience for your customers, you have to know them. Learn not just their demographics, but their interests and motivations. Collect consensual data about their online behaviors and interactions with your website and brand.

All those insights can lead to promotions and communications specifically designed for their needs and preferences.

2.  Create a customer referral program

In a referral program, your customers get a reward when they refer others to the brand. They might be motivated by the reward, but this action ties them closer to your business as well. They have a stake in your products being good because their reputation with others will depend on it.

3. Build a strong customer loyalty program

Another type of reward can occur when customers buy from you multiple times or stick with your business over a defined period. Rewards can include free promotional products, free items after a certain purchase threshold, coupons for special events like birthdays, and other perks like free shipping.

Make sure that the rewards you offer align with what your customers are looking for, and are substantial enough to make another purchase worth their investment.

4. Align your customer experience with your unique strengths

Customer experience means fulfilling basic expectations. But if you truly want to create product and brand champions, you have to connect on a deeper level.

Every time customers interact with you, highlight your values and unique strengths to remind them why your business is a great choice.

5. Engage your customers across channels

Engagement on social media and other online channels can create retention by strengthening the ties between your brand and your customers. Encourage that engagement through a strong social media presence, requests to leave reviews, interactive elements on your website, etc.

6. Encourage and respond to customer feedback

Not even the most loyal customers always have a positive experience. Asking for feedback ensures your customers will feel heard, and acting on that feedback shows you value them as much as they value your products.

Don't be shy about promoting a new product feature or business improvement that has come about because of this type of feedback.

Learn more about customer feedback platforms

Customer loyalty has undeniable business benefits, but it can also have negative side effects:

• Your drive for loyal customers might cause you to lower your price or increase your loyalty program value so much that profitability plummets.

• Loyalty shouldn't mean compromising your brand. Don't try to align with your most loyal customers to a point where doing so would pull you away from your core reason for existing or your brand values.

• Avoid prioritizing loyalty to the point where you're not recruiting enough new customers to offset the inevitable churn.

In other words, loyalty can be a bad thing if it’s taking a disproportionate amount of your marketing spend. The key is finding a balance where you sufficiently value and encourage loyal customers, without taking it to the extreme of hurting your profitability or brand.