Measuring customer loyalty: An overview of the most important KPIs
Customer loyalty is more important than ever these days. However, many companies are faced with the challenge of effectively measuring the success of customer loyalty. Is this even possible? Spoiler alert: Yes it is and in this article you will find out how.
Why is it important to measure customer loyalty?
It is well known that loyal customers spend more money. It is therefore essential for every successful company to address the issue of customer loyalty. But how can you convince management to release budget for investment in customer loyalty measures if success is not directly measured? This is precisely why it is important that you define suitable KPIs and set targets from the outset in order to be able to measure customer loyalty.
The most important KPIs for measuring customer loyalty
Every company that attaches importance to customer retention should look at these key figures:
Customer retention rate
The customer retention rate indicates what percentage of customers have remained loyal over a certain period of time and can be calculated on an annual, monthly or weekly basis.
Customer retention rate = ((CE - CN) / CS) x 100
CE = number of customers at the end of a specific period
CN = number of new customers acquired during the period
CS = number of customers at the beginning of the period
A customer retention rate of 85% shows that 85% of the customers at the end of the month were already there at the beginning of the month.
Which value reflects a good customer retention rate depends on the respective industry. In any case, the goal should be to continuously increase it - this speaks for higher customer retention.
Churn rate
The counterpart to the customer retention rate is the churn rate. It provides information on the percentage of customers who have left the company within a certain period of time.
Churn rate = ((CS - CE) / CS) x 100
CE = number of customers at the end of a specific period
CS = number of customers at the beginning of the period
The lower the churn rate, the better.
Customer Lifetime Value (CLV)
One of the most common reasons for the failure of start-ups is that the procurement costs of customers are higher than their value. The customer lifetime value provides information about the value of a customer over the duration of the active business relationship. In addition to income already realized, future potential is also taken into account. This makes it possible to use and calculate customer acquisition expenditure efficiently.
There are various methods for determining the CLV. One of these is as follows:
Customer Lifetime Value = contribution margin x resale rate x years
Customer retention measures lead to a steady increase in CLV.
Repurchase rate (repeat purchase rate)
The repeat purchase rate shows the percentage of customers who have made more than one purchase from a company. This can be seen as an indicator of customer satisfaction.
Repurchase rate = number of customers who have made more than one purchase / total number of customers
The higher the repurchase rate, the better.
Redemption rate
Sending vouchers with special offers can be an effective way to encourage customers to repurchase. If the redemption rate is low, you should get to the bottom of the causes.
Redemption rate = number of vouchers redeemed / number of vouchers sent out
The more vouchers redeemed, the higher the redemption rate.
Net promoter score (NPS)
The net promoter score is an indicator of how many customers would recommend a product or service to others. It is calculated by determining the difference between promoters and detractors. To do this, a representative group of customers is asked how likely it is that company XY would be recommended to a friend (scale 1-10). Customers who answer 9 or 10 are seen as promoters. Those who answer 7 or 8 are indifferent. All others as detractors.
Net promoter score = promoters in % - detractors in %
The result ranges from -100 (exclusively detractors) to +100 (exclusively promoters). The higher the value, the better.
Measuring KPIs and increasing performance
There are a number of key figures that provide information on the success of customer loyalty measures. Which one is relevant for the respective company depends on factors such as industry, company size or target group (B2C or B2B). It is important to look at the values over time and strive for continuous improvement.
Tip: Ideally, all the KPIs mentioned should be analyzed. In reality, this is often not possible due to a lack of time or data. It is therefore best to focus on a few KPIs that are particularly relevant to your company at the start and add to them at a later date if necessary. This will make it easier for you to maintain an overview and focus on the essentials. This way, you can always measure the bond with your customers.
