Before we get to the “how” of rethinking customer loyalty, let us take a look at some of the metrics that have emerged over the years to measure customer loyalty:
Capillary offers a good summary of the many loyalty metrics:
Net Promoter Score: Gauge your customer loyalty with a Net Promoter Score, which asks one essential question: How likely are you to refer our service? Not only does this let you know how satisfied a customer is, but it also tests how likely they are to purchase again–without annoying them with a long list of questions.
Repurchase Ratio: The repurchase ratio gives you the number of customers who come back to your business repeatedly, divided by one-time purchasers.
Upsell Ratio: [This is] the ratio of customers who’ve bought more than one type of product to the customers who’ve bought only one.
Customer Lifetime Value: CLV is an understanding of the total revenue attributed by the entire relationship (including future purchases) with a customer.
Customer Loyalty Index: CLI takes into consideration multiple factors like NPS, upselling, and repurchasing. It accomplishes this through a questionnaire addressing these three essential points: “How likely are you to recommend us to your friends and family? How likely are you to buy from us again in the future? How likely are you to try our other products?”
Customer Engagement Score: [This] assigns every customer a score based on their individual activity and usage of your services.
All of these are good metrics. As I started thinking about customer loyalty, I thought about it differently. What would I as a business or brand want? A monopoly! Wouldn’t I love it if all my customers bought all their needs only from me? Each customer has a different threshold of spending. So, if I could figure out all that they were spending in that category and ensure they only buy from me, I could then ensure a competition-free business – which is the ultimate objective of a business and the path to supernormal profits. Of course, this never happens in reality. Customers have different needs and no business can cater to every one of their needs. Yet, some businesses come close. Google in Search and Microsoft in operating system software are two examples. Google’s Search gets our attention which is then monetised, while Microsoft gets our dollars for its near ubiquitous Windows and Office combo.
For a business, the key then is to identify the Best Customers in its category, and ensure it can get a maximum of them. Once they are acquired, the key would be to figure out what is their spending threshold in the category, and then aim to maximise wallet share of that spend. This approach can cut off the oxygen of revenue and profits from competitors. This needs fostering extreme customer loyalty. That is why I think we need to define customer loyalty differently: receiving more than 50% of the spending (attention or money) by a customer in the category.
To maxmimse profits, businesses need a new approach to thinking about loyalty and loyalty programs. This is where Velvet Rope Marketing comes in.
Tomorrow: Part 8