How Loyal Are Your Customers? Six Tips For Measuring This Crucial “Growth Predictor”

by Jeff Sauro, author of “Customer Analytics For Dummies“

Sure, your company has satisfied customers. If you didn’t, you wouldn’t be in business (at least not for long). But here’s a question few companies ask: How loyal are they? Will they recommend your products and services to others? Will they stick with you through thick and thin? Or will they run at the first sign of a price increase or some other change that rubs them the wrong way? The mere presence of customers (even those who’ve stuck around long enough to make multiple purchases) isn’t enough. You need to be able to measure their loyalty so that you can use it to predict the health of your company.

Too many companies spend a ton of time and effort getting a customer to make a purchase, and then they just hope for the best. The problem with that approach is that operating in the blind in terms of loyalty makes it likely you’ll make ill-advised decisions that come back to bite you. When you measure customer loyalty, you’ll be able to not only make the most of that loyalty but also to make better strategic decisions for your company.

Customer loyalty is just one of the analytics that I highlight in my new book (which is relevant for almost all leaders, considering the extent to which measures and metrics have crept into almost every aspect of doing business). The book provides working knowledge of how to measure each stage of the customer journey and use the right analytics to understand customer behavior and make key business decisions.

Good customer management comes from good customer measurement. Customer loyalty is an important analytic for determining how well a company or product is positioned to grow or shrink based on future earnings. The ‘best’ metric for determining customer loyalty depends on the industry, company, and type of product or service, but for most organizations, measuring customers’ intent to repurchase your product or service and their willingness to recommend your company to others provides a solid base.

Read on to learn more about how to measure customer loyalty and to determine what it means for your company.

1. Find out if they’re likely to buy from you again.

Probably the first way to gauge customer loyalty is to compute the percentage of customers who are repurchasing, reusing, or returning to a product or service. This data can be collected from past sales or from surveying customers about their past or future intent.

Repurchase habits are measured differently, depending on the type of product or service offered. For example, for rental car companies, the repurchase rate is a good indicator of loyalty as certain customer segments rent multiple times per year and have many companies to choose from. For software companies, a similar measure of repurchase loyalty is the maintenance contract renewal rates.

Collecting actual repurchase rates and building a repurchase matrix can take years, especially for products that aren’t purchased frequently. To speed up the process and gauge your customers’ loyalty before they defect, survey your customers and ask their intent to repurchase. For best results, keep the surveys short.

2. Gauge word-of-mouth promotion with the Net Promoter Score.

The Net Promoter Score (NPS) is a popular way of measuring customer loyalty through understanding word-of-mouth marketing. It is based on a single question: “How likely are you to recommend [product or service] to a friend or colleague?”

NPS is calculated by following a three-step process. First, ask your customers how likely they are to recommend your product or service to a friend or colleague. Next, compute the proportions of promoters, passives, and detractors. Promoters are customers who are most likely to speak about and recommend your product or service. Passives are generally satisfied with your product or service but are less likely to recommend it to others.Detractors are not only the least loyal, but also the most likely to actually discourage friends and colleagues from purchasing or using your product. And finally, compute NPS by subtracting the percentage of detractors from the percentage of promoters.

Getting access to competitive data can be difficult for some industries and products. Even without competitive data, though, the best comparison is often measuring the same product, service, or company over time. Netflix offers a great example. In February 2011, the company’s NPS was very high at 73 percent. Then, in the fall of 2011, the company decided to split off its home delivery of DVDs and the streaming service into two companies, which angered customers. My company surveyed Netflix customers a month after the change and found the NPS had plummeted to –7 percent.

Perhaps Netflix did perform such testing and anticipate losing customers. The much larger loss is likely due to other factors and perhaps to untested customer correspondence and the geometric effect of negative word of mouth. But using the Net Promoter Score as a predictive analytic tool can help prevent disasters and identify winners early.

3. Be aware of bad profits.

How does it feel to pay the check at the restaurant where you had terrible service and bad food? Or how about paying $150 to change your airline ticket reservation? Obviously, nobody likes to pay for a subpar or overpriced product or for bad service, and yet, in these examples, companies financially benefit from a customer’s negative experiences. However, it’s a short-term benefit. Those are bad profits, and they’re a ticking time bomb. They lead to customer resentment and a decrease in customer loyalty, and they eventually impact profits negatively.

By combining Net Promoter Score data with customer-by-customer revenue data, you can estimate the amount of revenue derived from bad profits. Even if you don’t have access to financial data for your company or a competitor, you usually can estimate the percentage of bad profit revenue. For example, when my company measured customers of consumer software products a couple years ago, we found that about 17 percent of Adobe Photoshop users were detractors. Assuming everyone pays around the same price for a Photoshop license, some 17 percent of Adobe’s revenue from Photoshop comes from detractors.

While it’s bad to generate revenue from dissatisfied customers, it’s worse if a large proportion of your revenue comes from detractors, he explains. With too much detractor revenue for a product or entire company, you are more susceptible to new competition, alternatives, or abandonment.

If more than 10 percent of company or product revenue comes from detractors, there are two things you can probably do. Stop selling to those customers or attempt to fix the problems that are making your detractors unhappy. Making the adjustments to price, quality, and features to meet those customers’ expectations can be a huge challenge, but that’s usually what separates the best-in-class companies from the rest.

4. Find out what customers like most about your product/service.

One of the most effective ways to understand what drives customer loyalty is to conduct a key driver analysis. Key drivers are things like quality (Are your products reliable? Do they work as described?), value (Does your product give buyers the best bang for their buck?), utility (Does your product offer essential features?), and ease of use (Can customers use your features without frustration?).

A key driver analysis tells you which features or aspects of a product or service have the largest statistical impact on customer loyalty. It can be conducted for all customers but also for each of your different customer segments. At the end, you’ll be able to identify the most popular or unpopular features or aspects of your product or service and have customers rate that experience as well.

5. Pinpoint your haters.

While companies should strive for more promoters, it’s often the customers who are least satisfied with their experience who have a much larger impact on referrals and the brand. Research supports that customers who are dissatisfied with a product or service experience are actually more likely to be vocal and tell more friends and colleagues about their bad experience than generally satisfied customers.

For example, I’ve used Mint.com for years. Its website allows you to see your personal and small business finances, expenses, and investments all in one place. Unfortunately, the product team recently turned off the small business categorization feature with no notice to customers. This meant hundreds of hours of logging small business expenses were lost and unrecoverable.

Understandably, a lot of loyal customers were upset and let the company know. While it’s unclear what will happen to the product, the experience has been so frustrating that I’ve shared it with at least a dozen close friends who manage small businesses and track their personal finances with Mint.com. This one change turned a promoter into a detractor.

The negative effects of detractors can outweigh the positive effects of promoters. Again, once you’ve identified your detractors, you’ll have some decisions to make.

If you want to win them over, you’ll have to find out what will make them happy and loyal, and then decide whether it is worth it to spend the resources to make those changes or whether it’s more cost efficient simply to go after new customers who will be happy with the way your company currently operates.

6. Make sure you’re getting your money’s worth from promoters.

Generally speaking, promoters are a positive asset to your company. But before going all-out to attract as many as possible, you should take the time to understand how valuable a promoter is, both in terms of revenue and in how many new customers a promoter brings to a company. The best way to understand how much revenue a promoter generates is to tie actual sales to survey responses to see how many promoters actually recommended someone, and how many of those people who heard the recommendation actually became customers.

With some estimate of the number of promoters you need to gain a new customer, you can then weigh the cost of new programs, features, pricing, and promotions to determine if the benefit from new customers outweighs the cost. For example, if you have to reduce the price of your product to turn customers into promoters, gaining those promoters might not be financially sustainable. Or you might find that it would cost close to a quarter of a million dollars to add a new feature to a product, while that new feature would generate only 10 new promoters — not worth it. And for websites, a new ‘customer’ might just be a new visitor or subscriber, so the cost of gaining new promoters can be important.

Oh, and one more point: If you use a particular price, deal, or feature to gain promoters, think twice before changing it after those people have begun singing your praises. Remember my experience with Mint.com: The removal of a feature turned me from a promoter to a detractor. Nobody likes to experience a bait-and-switch!

Customer loyalty isn’t black and white. When you can use analytics to dig into why customers buy from you, how often they do or don’t recommend you to others, and so on, it becomes very beneficial for your business. You can make better product decisions, provide better service, and make changes to ensure you can create many more loyal customers.

Jeff Sauro is a Six Sigma-trained statistical analyst and pioneer in quantifying the customer experience. He specializes in making statistical concepts understandable and actionable. He is the founding principal of MeasuringU, a customer experience and quantitative research firm based in Denver, Colorado, USA. He is an author of four books, includingauthor of “Customer Analytics For Dummies“.