Customer Loyalty: Definition, Tips, & Solutions
Focus on positive experiences, valuable offers, and building community to drive customer loyalty. Read how SheerID can help you grow customer loyalty.
What is Customer Loyalty?
Customer loyalty is a measurement of a customer’s likelihood to do repeat business with a company or brand. And it’s a marketer’s dream—because it’s usually much more expensive to attract and convert new customers than it is to keep existing ones happy.
But customer loyalty isn’t a given. Poor experiences or lower-priced competitors can erode loyalty over time, so brands must actively focus on nurturing customer relationships in order to maintain them.
Customer Loyalty vs Brand Loyalty
Imagine a family that buys Ford cars or trucks with near-religious devotion and would never even consider purchasing a Chevy, regardless of its features or price. That’s brand loyalty—it’s deeply emotional, reflects a customer’s perceptions of and connections to a brand, and isn’t easily swayed by competitor offers.
Customer loyalty is more transactional. It can be impacted by prices or perks—hence the popularity of customer loyalty programs full of incentives to drive repeat purchases. Brand loyalty doesn’t need to be incentivized because the reward is the brand experience itself.
Why is Customer Loyalty Important?
Customer loyalty may be transactional, but it’s still incredibly valuable. Research shows time and again that repeat customers:
- Convert 9x more than first-time shoppers
- Spend 3 to 7x more per visit
- Are 50% more likely to refer new customers
Most brands today are implementing customer loyalty programs because adding a customer loyalty program has been shown to help them:
- Boost sales. Customers are tempted to spend more money when they have incentives to earn rewards or discounts.
- Improve customer satisfaction. Shoppers expect to receive benefits from the companies they shop with. Whether you give them discounts, free products, or money back, offering rewards keeps customers happy and makes them more likely to return to your business.
- Reach new markets. Loyalty programs allow you to deliver discounts to the masses, but they also enable you to provide special offers to your key consumer communities, such as students, military, teachers, employees, or even professionals in specific industries.
- Gain market insight. By reaching out to different audiences through your loyalty program, you gain important data into what types of customers are shopping with you, what they are buying, where they are shopping, and how much they are spending.
- Increase revenue. Existing customers spend 67% more than new customers.
- Boost customer engagement. Having a loyalty program gives you the opportunity to interact with your customers and keep them updated on your promotions and exclusive offers via email, mailings, SMS message, etc.
Sephora is just one example of a company with a successful customer loyalty program. The cosmetics brand uses a points-based loyalty program and has customers use their Beauty Insider card at every purchase, which, in turn, allows Sephora to gather important purchase data. Sephora also offers special programs that give customers more rewards when they reach certain spending thresholds.
Loyal customers buy more often, spend more with each purchase, and send new business your way. Clearly, it’s a worthwhile investment to nurture and maintain those relationships. And, just like most worthwhile marketing activities, it all starts with measurement.
How to Measure Customer Loyalty
There’s no single, simple metric to measure customer loyalty, but you can get a good understanding of your baseline by collecting direct feedback, calculating lifetime value, and analyzing customer behavior. Here are a few places to start.
Net Promoter Score
What it is: The Net Promoter Score, or NPS, measures your customers’ response to one question: “On a scale of zero to ten, how likely are you to recommend us to a friend or colleague?” Based on their ratings, your customers are segmented into three groups:
- 9-10: Promoters, or your most loyal fans and advocates
- 7-8: Passives, or neutral customers who don’t have a strong connection but still buy your products
- 0-6: Detractors, or dissatisfied customers who may be vocal critics of your brand
Your NPS is calculated by subtracting the percentage of detractors from the percentage of promoters, so you’ll get a score somewhere between -100 (very bad) to 100 (unbelievably positive).
How NPS measures customer loyalty: The NPS framework was developed by Bain & Co. researchers who determined that the likelihood of a recommendation was the simplest way to measure loyalty in one question.
One key benefit of NPS is that it’s widely used, so you can compare your ranking with industry benchmarks to understand how your customer loyalty stacks up against your competition. And, as a best practice, you can ask a follow-up question to gather more detailed feedback about what you’re doing well and where you can improve.
Tools that measure NPS: You can collect and analyze NPS manually through any survey tool, but specialized platforms like AskNicely or Delighted make it much easier to gather, analyze, and act on customer feedback to drive loyalty.
Customer Lifetime Value
What it is: Customer Lifetime Value (CLV) is a metric that reflects the total worth of your customer over the duration of your relationship. Calculating your average CLV requires your company to have a firm grasp of cross-functional data to fill in the following equation: Customer revenue per year multiplied by the number of years they remain a customer minus the cost of acquiring the customer.
How CLV measures customer loyalty: CLV is a tangible measure of how much revenue each customer (on average) delivers to your business, which isn’t exactly the same as loyalty, but does provide a useful way to compare customer segments and determine which groups are the most profitable—and, potentially, the most valuable to invest resources into keeping happy.
Tools that measure CLV: Many CRMs and customer experience management solutions (like Pega or Optimove) can track and calculate CLV—assuming you have the right data sources integrated across your business.
Repeat Purchase Rate
What it is: Repeat purchase rate is just that—the percentage of customers who come back to buy from your brand after their first purchase.
How it measures customer loyalty: Repeat purchase rate gives you an idea of how many customers buy more than once, which is the first step towards becoming a loyal customer. But the metric itself doesn’t tell you much about who your most frequent purchasers are or how frequently they buy from you.
Tools that measure repeat purchase rate: Most e-commerce platforms, like Shopify or BigCommerce, include built-in analytics dashboards that display repeat purchase rates.
What it is: When a happy customer recommends your business to a friend or colleague, that’s a referral. Referrals can happen through incentive-driven programs (like offering a discount for the referrer, the referral, or both) or just through good, old-fashioned word-of-mouth.
Your referral rate is the volume of referred purchases as a percentage of total purchases (so if 10 out of 100 purchases stem from referrals, then you have a 10% referral rate).
How it measures customer loyalty: Your referral rate is a reflection of customer loyalty, because generally, referrals are only given by customers who are very happy with your products or services.
Tools that measure referral rates: Since referrals can be made in many ways, it can be tricky to measure and track them. You can survey customers to ask how they heard about you and calculate your referral rate manually, or use software solutions like Referral Candy or Yotpo to manage and analyze the success of specific referral programs.
What it is: Your churn rate captures how many of your customers end their relationship with you over a given period of time and is especially important to subscription-based businesses, like streaming services or SaaS companies.
Churn can be calculated in a few different ways—by the number of customers or percentage of revenue—but usually includes dividing the number of lost customers during a time period by the number of customers you had at the start of that time period.
How churn measures customer loyalty: Churn is an inherently backward-looking metric, but a crucial one for subscription-based companies to monitor. It can be an indicator of low customer loyalty, but it doesn’t give a full picture since it doesn’t measure the happiness or enthusiasm of remaining customers.
It also doesn’t capture the customers’ reasons for leaving. For example, switching to a competitor would indicate low loyalty, whereas simply no longer needing the service would not.
Tools that measure churn: Almost all CRM software solutions will track and report on churn.
Types of Customer Loyalty Programs
Once you’re actively measuring consumer loyalty, you can begin to focus on improving it. Reward programs are an incredibly popular and easily measurable way of creating customer loyalty. Every customer loyalty program looks a little different, but the overall goal is to offer incentives to customers that reward repeat purchases, higher spending, and/or referrals.
Point-Based Loyalty Programs
How it works: Point-based loyalty programs are straightforward: for every dollar a customer spends or purchase they make, they earn a certain number of points. Those points can be redeemed for customer rewards, from dollars off a future purchase to additional discounts to free items.
Who’s doing it well: Madewell has a streamlined, easy-to-understand points system. Starbucks makes it easy for customers to frequently redeem points in small increments or save up for bigger freebies
Pro tip: Drive engagement through gamification by offering opportunities to earn bonus points on specific purchases or during time windows.
Tiered Loyalty Programs
How it works: For brands with higher-priced offerings that may not be purchased as often as cups of coffee, tiered loyalty programs encourage repeat purchases by unlocking more valuable benefits after spending more.
Who’s doing it well: Hyatt combines tiers and points in their World of Hyatt program. As customers achieve new loyalty tiers, Hyatt gradually increases the number of points they can earn and provides them with additional perks like late check-out and free WiFi.
Sephora’s popular Beauty Insider program offers tiered perks like extra seasonal discounts—and lower free shipping thresholds—as participants climb the loyalty ladder.
Pro tip: To encourage sign-ups, offer entry-level perks that all members can enjoy, regardless of tier (like free shipping or a dedicated customer care line).
Paid Loyalty Programs
How it works: Paid client loyalty programs require an entry fee to participate. And while they aren’t for every brand, customers that participate in paid loyalty programs are 60% more likely to spend more—and buy more frequently—after enrolling.
Who’s doing it well: Amazon Prime is a widely popular example of a paid loyalty program. Its promise of free 2-day shipping has driven 200 million customers to fork over $119/year for membership.
CVS offers a CarePass program for $5/month that provides benefits like a 20% discount on store brand products and free same-day prescription delivery.
Pro tip: Paid loyalty membership programs take a great deal of careful planning to deliver an offer engaging enough to drive enrollment alongside profitability for the business—so take a page from Lululemon’s example and test your program before launching at scale.
Tips for Maintaining and Building Customer Loyalty
Reward programs are incredibly popular customer loyalty solutions, but they aren’t enough. After all, your competitors are all working from the same loyalty program playbook.
To truly differentiate your brand in your customer’s mind, here’s how to build customer loyalty by balancing value and perks with customer experience, community, and deeper connections.
Prioritize Customer Experience
Along with perceived value, customer experience is obviously a key driver of loyalty. Half of customers say they would switch to a competitor after one bad experience. And 89% of customers report they’re more likely to purchase again after a positive customer service experience
To make a significant impact on customer experience, you need to understand what your customers think and feel about your brand.
Use the feedback you’re collecting from NPS or other customer surveys to identify gaps and prioritize improvements to your product or service—like how fitness brand The Camp TC introduced new pricing tiers and in-gym accountability programs based on frequent requests in their NPS responses.
To move beyond transactional value to deeper brand loyalty, brands need to focus on building connections—to help their loyal customers feel like a part of an inner circle or exclusive group.
That’s why many customer experience thought leaders are starting to recommend a focus on building community, connecting your loyal fans with one another to drive a sense of shared belonging.
Communities can be in-person or completely digital. For example, software company Alteryx hosts a robust forum where customers exchange ideas and expertise, while fans of women’s shoe startup Rothy’s gather in lively Facebook groups.
When your loyal customers converse with one another about your products or upcoming promotions, their emotional ties and investment in your brand continue to deepen. (And if the idea of a consumer community gives you nightmares about group complaint sessions, it’s probably a sign you should keep focusing on customer experience.)
Promote Shared Values
To achieve meaningful, lasting customer loyalty, it’s not enough to deliver a great product and solid experience—your brand needs to resonate on a deeper level with your core audience.
That means cultivating and promoting your shared values. In fact, over 70% of consumers said they’d be more likely to be loyal to and make purchases from a purpose-driven company over a similar competitor.
Consider what values your company naturally shares with your loyal customers, and how you can build giving programs that reinforce those connections. For example, The North Face’s Explore Fund removes barriers to exploration by providing grants to nonprofits and partnering with outdoor leaders.
How to Create a Successful Customer Loyalty Program
Implementing a customer loyalty program can seem like a huge task, but it doesn’t have to be a painful process, and the benefits that companies see make it absolutely worthwhile. The following guiding principles can help you create a successful customer loyalty program.
Ask for the Right Information
While customers can be extremely motivated by discounts and rewards, sometimes giving up a large amount of personally identifiable data can make them opt out. When setting up a customer loyalty program, ask for only basic information, such as name, email, or address, and avoid asking for any information that might be deemed unnecessary, such as a social security number.
Make Your Offers Simple and Consistent
Complicated customer loyalty systems generally confuse customers and make them less likely to sign up or continue using your program. To ensure your discounts and rewards are successful, keep your system extremely basic and keep everything transparent and consistent to help avoid any misunderstandings.
Make Your Offers Exclusive
Offering general customer loyalty programs can be very effective, but you can take it one step further by offering rewards to specific groups, like teachers, students, the military, or even your VIPs. These segments respond well when they see brands providing them with exclusive discounts—in fact, 84% of teachers said that they are more loyal to brands that offer teacher discounts.
Leverage Identity Marketing to Drive Customer Loyalty
Even if online communities have yet to take off or shared values aren’t readily apparent, brands can forge deeper connections with customers by reaching out to them based on the communities they’re already part of through identity marketing.
Identity marketing ties personalized offers directly—and exclusively—to customer groups based on life stage (like students), professions (like healthcare workers), or affiliation (like the military).
These offers are digitally verified through a platform like SheerID (yours truly), providing a seamless customer experience while collecting minimal, privacy-friendly information to protect brands from discount abuse.
How Personalized Offers Impact Loyalty
Identity marketing drives customer loyalty by building genuine connections with customers through personalized offers that honor their identity. It’s a type of emotional marketing that drives engagement because it makes customers feel appreciated and excited.
Those positive feelings, in turn, drive purchasing and referral behavior. Our research shows that:
- 3 in 4 students, teachers, and military members report preferring to shop at brands that provide exclusive promotions based on identity.
- More than 60% of the military community and almost 70% of college students say a personalized offer would make them shop at a brand more often.
- Over 95% of nurses, first responders, students, and teachers would share a personalized offer with others in their community.
Integrating Identity Marketing Data with Loyalty Programs
To support consumer loyalty efforts, SheerID’s Identity Marketing Platform can integrate with loyalty programs to help brands deliver the most possible value while building truly meaningful connections.
Additionally, by incorporating identity marketing into their loyalty programs, brands can harness the zero-party data that their customers provide in exchange for discounts. This data can be used to further personalize marketing campaigns and deliver more relevant customer experiences across the board.
For example, arts and crafts retailer Michael’s digitized their discount program—15% off for seniors, teachers, and the military—by integrating SheerID into their online loyalty program. Michael’s improved their digital customer experience and created an opportunity to expand discounts and celebrate community holidays, like Grandparents Day and Teacher Appreciation Week.
Driving customer loyalty takes focus and effort, but tactics like loyalty programs, community building, and identity marketing make it possible to make a measurable impact. And you can even get a personalized offer campaign up and running in days with SheerID’s Identity Marketing Platform. Request a demo to learn more.