It’s always fun to focus on lead generation, marketing tactics, and optimizing your Instagram ads.
But how often have you thought about how to maximize your repeat business? New lead acquisition is often far more expensive than serving an existing customer.
Therefore, if you’re an ecommerce business owner, it’s crucial to understand how customer loyalty drives revenue and how you can improve it.
In this comprehensive article, we’ll give you a primer on what customer loyalty is and show you how to improve and measure it by some of the most popular metrics.
What is meant by customer loyalty?
Customer loyalty is the term used to describe how likely a customer is to make another purchase after their first.
It’s often differentiated from brand loyalty: a more profound commitment to a particular company independent of the product.
For example, returning to a particular ecommerce store to purchase a product because of a great prior experience is customer loyalty.
While buying any and all Apple products — strictly because of the Apple name — is brand loyalty.
What is a customer loyalty program?
Simply put, a customer loyalty program is a system that encourages customers to keep coming back.
Customer loyalty programs can be as simple as discounts for repeat customers or full-fledged customer advocacy platforms.
The former can be simple punch cards, while the latter can be multi-tiered programs with points and rewards. Whichever one you choose to implement, the main goal is to bring customers back to purchase your products.
Examples of loyalty programs
More than 90% of businesses use loyalty programs. Here are a few popular ones, along with the companies that use them:
Spend-based programs (Delta, JetBlue, and most airlines)
The customer earns points (which often translates to free travel miles) for every dollar spent on the airline. This encourages loyalty and plays on the sunk cost fallacy (“I already spent all this money with Jetblue, so we have to fly with them”).
Frequency-based programs (Starbucks)
The customer earns stars based on how often you visit Starbucks. The more frequently they go, the more perks and bonuses are available.
Time-based programs (IKEA family loyalty program)
Shoppers can earn points based on how long they’ve been a member of the program.
Cashback programs (Bank of America)
Customers can earn cashback or rewards for purchases that they make with Bank of America.
Tier-based programs (DSW)
Shoppers are placed in one of three tiers based on their spending habits. The higher the tier, the more rewards are available to the customer.
Mission-driven programs (Ben & Jerry’s)
Ben & Jerry’s has certainly raised some eyebrows with its overt activism and outspoken take on social issues. While this may be divisive to some, it can garner incredible loyalty and support from those aligned with those particular viewpoints (no tiers or discount codes needed).
Tiered, point-based programs (Sephora)
If you want to steal one of the finest examples of a customer loyalty program, look no further than Sephora. The make-up brand boasts one of the best point-based loyalty programs around in their Beauty Insider campaign.
Free perks programs (Grubhub)
In this model, customers can earn points for every order that they place. Customers can redeem these points for free food or discounts on future orders.
This list is by no means comprehensive. You can combine one or more of these strategies to make an even more effective hybrid customer loyalty program.
It depends on your business goals and your customers’ unique pain points and desires.
Why customers come back for more
There are many reasons why people buy more than once from an ecommerce business. It’s difficult to pinpoint a definitive list of reasons (which also change drastically from business to business).
Did they appreciate your stance on social issues, or was it just the most convenient product to purchase?
Did the discount code drive their decision, or was it just because your website was the easiest to navigate?
Regardless of why people buy again from you, you must know how many customers have bought more than once to predict future purchase behavior.
The topic of customer tracking is well beyond the scope of this post, but do yourself a favor and get some form of analytics going on all your online properties. We prefer Google Analytics because of the unbeatable price (free) and comprehensive customer tracking insights.
What drives loyalty?
Customer loyalty is a moving target, and it varies from industry to industry. There are, however, some common factors that determine how likely your customers will come back for more, including:
- Price (Walmart, Amazon)
- Quality of product or service (Apple, Nordstrom)
- Convenience (Target, CVS)
- Relationship with the customer (Zappos, Chick-fil-A)
Remember that these aren’t the only drivers of customer loyalty, but they’re among the most important ones to focus on as you implement new strategies to retain your customers.
Why is customer loyalty so essential to ecommerce?
Everyone is jumping on the ecommerce bandwagon — especially in our new post-pandemic hyper-connected world.
If you’re going to beat out the competition, you need every edge you can get.
Here are a few reasons why customer loyalty is so essential in increasing the overall value of your ecommerce business:
It promotes word of mouth
Retailers struggle to break even on one-time shoppers due to the high cost of customer acquisition. In contrast, loyal customers convert friends and family into customers by word of mouth, which, in turn, translates to more revenue at no extra cost.
It costs less
Customer acquisition costs are among the highest expenses for ecommerce businesses, and it’s even higher for retailers with physical locations.
Research shows that acquiring a new customer costs around five times more money than retaining an old one.
It increases average order value (AOV) and customer lifetime value (LTV)
Existing customers are 50% more likely to purchase from you again and, on average, spend 31% more money when they do purchase.
The more loyal customers you have through repeat purchases, the more likely they will buy add-ons and complementary products.
It reduces churn
Churn is the rate at which a business loses existing customers. ecommerce businesses that recognize the value of repeat business will watch this number carefully.
The average ecommerce company loses between five to eight percent of its customers each month. If you can retain your existing customers, though, it becomes much easier to cut down on churn and save money over time.
It builds trust and familiarity
Existing customers have already been through the sales funnel and are more likely to buy from you simply because you’ve already delivered a good experience once.
They’ve learned about your product or service and trust what it provides, so there’s a higher chance of them coming back for more instead of going somewhere else.
It increases revenue
Existing customers are more likely to buy again, which means they generally value higher than new prospects. The longer someone is a customer of yours, the more likely their average order value will rise. This is because they know what your business offers and trust you with their personal information.
It makes your brand stand out from its competitors
When customers are loyal to a brand, it becomes harder for competitors to poach them.
They’ve already invested time and energy in learning about your company and what it has to offer, so they’re less likely to switch over to another provider that doesn’t quite compare.
It amps up client satisfaction
Satisfied customers are more likely to be loyal and recommend your business to others. They’re also less likely to churn, which is why it’s essential to focus on customer satisfaction as one of your crucial loyalty drivers.
And if those benefits are not enough, there are some other advantages to consider.
Firstly, organizations with solid loyalty marketing programs increase their revenues 2.5 times faster than their competitors. Secondly, they generate 100-400% higher returns to their shareholders.
Lastly, customer loyalty programs help foster a more engaging experience for the customer experience, with 75% percent of customers basing purchasing decisions on their experience, according to a 2021 Zendesk survey.
Also, half of the customers surveyed said that a good customer experience is more critical now than in the previous year.
How loyal customers drive an ecommerce business’s revenue
Now that we understand why customer loyalty is so important, let’s look at how it drives revenue in an ecommerce business.
When customers are loyal to your brand, they tend to buy more products from you. In fact, research shows that the average repeat buyer spends 67% more than new buyers do.
This is because loyal customers are comfortable with your brand and what it offers. They know the product, trust the quality, and are confident in your service.
Another reason repeat buyers spend more money is that they’re often looking for something new.
As we mentioned earlier, existing customers are 50% more likely to try a new product than new customers. So, they’re not only buying more products from you, but they’re also willing to experiment with different items.
Loyal customers are also more likely to refer their friends and family members to your business. More to the point, a Nielsen study found that 92% of consumers trust referrals from people they know over any other form of advertising.
When you have loyal customers, they’re constantly telling their friends about your products and experiences with your brand, which helps bring in more business through the door.
How do customer loyalty programs work?
Now that we know how customer loyalty drives an ecommerce business’s revenue, let’s see how you can improve it. One of the best ways to do this is through a customer loyalty program.
Customer loyalty programs work by rewarding customers for their continued patronage. This could be in the form of points, discounts, or special access to products or services. Whatever the reward, it’s vital that it’s valuable to the customer.
Customer loyalty programs — especially in ecommerce — often require some form of tracking.
Tracking is imperative for understanding who’s purchasing what and how they arrived at your website.
You can then use this information to create targeted marketing campaigns specifically for them.
For example, suppose you notice that a particular customer is buying a lot of men’s clothing. In that case, you can send them discounts and offers on those types of products (and perhaps tweak your campaigns to target that demographic more precisely).
Another way to build customer loyalty is simply providing exceptional service whenever your customers interact with your business.
It doesn’t matter if it’s over the phone or online — what matters most is that they feel valued as a patron.
You can do this by promptly responding to their questions and concerns, offering unique products and services that they can’t find elsewhere, and making them feel like they’re part of the family.
For more information on the topic, check out our post on customer-centricity.
How to improve customer loyalty in your business
There are various ways to improve customer loyalty in your ecommerce business. Here are a few of the most effective methods:
Reward frequent customers with a loyalty program
One of the best ways to reward customers for being loyal is by implementing a loyalty program. This gives them incentives to keep coming back and buying from you. Common rewards include points, discounts, or exclusive access to products or services.
Make sure the program doesn’t require too much effort from customers to get what they want out of it (i.e., long wait times for points to add up, confusing rules and procedures, etc.).
Send event-based emails
Another great way to keep your customers engaged and interested in your brand is by sending event-based emails. These are emails sent out to celebrate a special occasion, such as a holiday, anniversary, or a customer’s birthday.
They remind customers of the good times they’ve had with your company and make them more likely to come back for more.
Segment your clients
The best way to personalize your customer experience is by segmenting your clients. Segmentation is the process of dividing them into groups based on factors such as their age, gender, location, or purchase history.
By doing this, you can provide each group with customized offers and content that appeals to them specifically.
Encourage shoppers to give feedback
The more you know about your shoppers, the better. So, encourage them to give feedback on their experience with your brand and act on it.
This will help improve customer loyalty because they’ll feel like you’re actually listening to what they have to say.
Make customer care a priority for the brand
When it comes to customer loyalty, the little things make a difference. And one of these small details is making sure that your brand values its customers enough to prioritize customer care.
This means having dedicated support agents who are knowledgeable about your products and services, fast response times for inquiries or issues, and quick resolutions when problems arise.
Optimize the businesses’ referral program
Optimizing your referral program is one of the easiest ways to improve customer loyalty.
You can do this by offering discounts or incentives for customers who refer their friends and family members. Then, thank them publicly via email or social media when they refer someone (if this makes sense for your brand).
Boost the customer experience by introducing VIP tiers
Have you ever heard of the “VIP Effect?” It’s when an increasing number of customers begin to spend more money in a store or on its website, simply because they’re aware that other important people are also buying from it.
These companies were trying to achieve this with their VIP tiers, and it turns out that it works like a charm.
Utilize promotions and discounts
These can help increase the number of first-time purchases and show new customers that there’s a reason to come back.
However, businesses shouldn’t use it on all items, or they’ll risk devaluing their products and hurting sales over time. It shouldn’t be too frequent or last too long, either.
Provide valuable, engaging content
If you can keep customers engaged with your brand by providing exciting and valuable content, they’re more likely to come back for more. We’re big fans of this approach here at Linnworks.
Great content takes the form of blog posts, video content, podcasts, webinars, or email newsletters.
Have a convenient checkout process
The easier you make it for customers to buy from you, the more likely they are to come back. This means having a quick and easy checkout process and an intuitive website design that makes it easy to find what they’re looking for.
When should you add a loyalty program to your company?
You might expect us to say, “It’s never too soon to start a loyalty program! Start one today!”
But we don’t think that’s the correct answer. Plus, we’re not interested in adding one more thing to your already overflowing plate.
If you start your loyalty program before having a solid customer base, you’re putting the cart before the horse.
How can you deeply understand your customers’ pain points and desires and tailor a program to them if you have no (or very few) customers?
When you start to notice patterns in your customer’s behavior and feel like you understand them, that’s a good sign that you’re ready to start a customer loyalty program.
Why loyalty programs sometimes fail
Loyalty programs fail for several reasons, but here are the most common ones:
Lackluster customer service
If customers feel like you’re not taking their issues seriously, they’re likely to become disgruntled and leave.
Excellent customer service is the cornerstone of customer loyalty programs. You can’t have the latter without the former.
Customers need to feel like the rewards they’re receiving are worth their while. If not, then they’re likely to stop participating and go elsewhere.
Make sure you research what rewards work well for your target audience (best done through a survey) and offer them consistently across all membership tiers.
An inadequate strategy
A lot of companies make the mistake of using their loyalty programs to boost customer acquisition instead of retention.
New leads and sales are apparent, while customer retention costs (albeit more significant in gains) can be hard to quantify.
This can cause stakeholders to lose sight of the mission of the customer loyalty program and start using those assets and resources to attract new customers. Fight this temptation and remember the goal!
Poorly executed programs
Customers can sniff out when you’re pandering to them. Don’t make the mistake of thinking that customer loyalty is a set-it-and-forget-it strategy. It requires upkeep, consistency, and several hours of work per week (especially in the beginning).
A poorly executed loyalty program will fall flat simply because of the lack of customer buy-in.
There is no seamless multi-channel customer experience
Loyalty programs are more effective if they offer a seamless multichannel customer experience. This means that the rewards you’re offering your customers should be available across all channels, such as email and social media.
Lack of a quality product
This point may seem like a no-brainer, but it’s worth repeating. If you don’t provide high-quality products to begin with, then it doesn’t matter how well or often you communicate about your loyalty program. Customers are likely to be dissatisfied with their purchase and not come back.
Failure to personalize rewards
Rewards that aren’t personalized or relevant to the customer won’t hold much appeal. This means taking the time to understand what your customers want and need and tailoring your rewards accordingly.
Inability to track results
Without proper tracking, you won’t be able to determine the ROI (the most crucial metric) of your loyalty program.
Tracking can also help you identify problems you wouldn’t have been aware of otherwise. This point segues us nicely into the metrics that measure customer loyalty.
Metrics that measure customer loyalty
Metrics and Key Performance Indicators (KPIs) are essential in business because they give you cold, hard data about how you’re performing against your goals.
Customer loyalty metrics are equally critical to ensuring the success of your business.
Here are a few key metrics that you can use to measure customer loyalty:
Ratio of repurchase
Ratio of Repurchase measures the number of customers who have made a second purchase against those who have not.
For example, a 1:10 RoR means for every ten customers that purchase, one of those customers will purchase again.
Customer retention rate
This metric measures how many of your existing clients have made a second purchase within a specific time frame (usually a month, quarter, or year).
It’s important because it tells you what percentage of your current customer base stays loyal to your brand over time. The higher the retention rate, the better.
Customer churn rate
As mentioned above, this metric measures how many customers you’ve lost in a given timeframe — the lower the churn rate, the better.
It’s important to note that this metric is not affected by external factors such as competition or the economy — it purely reflects your company’s ability to keep customers satisfied.
Customer lifetime value (LTV)
You can use LTV to measure the value of a customer over the entire duration that they do business with you. LTV helps you determine how much revenue a customer will generate throughout their relationship with your brand.
It’s important because it can help you determine how much you should be investing in acquiring and retaining these customers.
Net promoter score (NPS)
This metric is one of the most popular in the customer service world. NPS gauges customer loyalty according to simple criteria — how likely the customer is to recommend your company to others on a scale of 0 to 10.
The answers segment them into categories of Promoters (score of 9-10), Passives (score of 7-8), and Detractors (score of 6 or less).
You can compare your Net Promoter Score with the industry benchmark by visiting the Net Promoter Network. To calculate your business’s net promoter score, subtract the percentage of detractors from the percentage of promoters.
Customer satisfaction index (CSAT)
CSAT measures the number of customers who are satisfied with their experience compared to those who are not. You can calculate it by subtracting the sum of all negative ratings from the sum of all positive ratings. Then, divide that figure by the total number of respondents.
This metric measures how often you offer customers an upgrade or a higher-priced product when they’re making a purchase. The higher the upsell frequency, the more likely you’re providing a good customer experience.
Customer effort score (CES)
Experts developed the customer effort score to measure how much effort customers perceive they need to exert to complete a purchase.
CES requires that you survey customers after their purchase. Then, divide the negative responses by the total number of respondents.
The smaller the figure, the more likely your customers will have a great purchasing experience with your brand (and are that much more likely to return).
Customer loyalty index (CLI)
This metric is a standardized tool that provides a composite score of all the other loyalty metrics and an overall view of your customer loyalty progress.
There are many different ways to combine loyalty metrics into a CLI, and all of them depend upon your individual business needs. The main benefit of this metric is having all your loyalty data summed up in one easy-to-understand KPI.
CLI makes tracking improvement — and presenting that improvement to stakeholders — much more straightforward.
Metric results are key to continuous improvement
As you can see, there are quite a few different ways to measure customer loyalty. And while no single metric is perfect, using several of them together will give you a good understanding of how well your company is doing to keep customers satisfied and come back for more.
If you’re looking to improve customer loyalty, it’s vital to understand why they might be leaving. Are they not finding what they’re looking for on your site? Is the checkout process too complicated? Or are they simply being lured away by your competition?
Once you know where the problems are, you can implement measures to fix them and continuously improve your business.
Here’s what you should know after reading this post:
- Customer retention is far more profitable than customer acquisition, yet most brands don’t focus on it nearly enough.
- Many notable brands (listed above) use customer loyalty programs to great success — don’t reinvent the wheel. Steal their best practices!
- Customer service is a prerequisite to customer loyalty.
- Choose your KPIs and carefully measure your customer loyalty efforts to determine your ROI.
Simply put, improving your customer loyalty will significantly impact your company’s bottom line.
Linnworks is an ecommerce Inventory Management Software company that understands the importance of customer loyalty and its impact on revenue.
That’s why we offer features like our QuickBooks integration, which makes it easy for businesses to keep track of their inventory and sales. We also provide excellent customer support so that our community always has the help they need when they need it.
If you’re looking for an inventory management platform that understands the importance of customer loyalty, we’re here to help. Contact us today to schedule a free demo and see how we can help you take your ecommerce business to the next level.