The Complete Guide to Customer Loyalty and Retention

We often discuss building customer loyalty and retaining customers, but how can businesses use them to perfect their customer service journey?

Rob Mead

10th November 2022

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Customer loyalty and retention are key to increasing business revenue and meeting KPIs – that’s no secret. However, with customers and businesses tightening their belts by being more careful with how they spend their money due to the current cost-of-living crisis, their value has never been more important.

To help you improve your loyalty and retention rates, we’ve put together this comprehensive guide. Read on to discover the value they can bring to your business, how to work out where your loyalty and retention rates currently sit and finally, how to achieve growth in these areas.

What is customer loyalty?

A loyal customer will repeatedly buy from your brand and go beyond the financial transactions by becoming a brand advocate.

If a customer has multiple positive interactions with a business, this will build up trust and create an ongoing positive relationship. For example, customers are more likely to associate positivity with a brand if they’re receiving consistently high-quality customer service or high product quality.

A loyal customer will usually return to the brand over choosing a competitor, which leads nicely to customer retention.

What is customer retention?

Retaining customers is usually linked with maintaining a loyal customer base for your brand.

Customer retention essentially refers to a brand’s ability to gain customers’ repeat business. High customer retention means customers will continue to purchase and be satisfied with a brand’s products or services over that of a competitor.

The value and relationship between customer loyalty and retention

Customer loyalty and retention are not intrinsically linked – it’s possible to have loyal customers without gaining their retention. However, customer retention often improves by creating better customer loyalty, which could mean retention relies quite heavily on already-earned loyalties.

This is because retention measures the transaction based on whether the customer is happy with the aspects of their purchase.

At a time when it could be more difficult to persuade customers to part with their cash, it is the job of the business to find a cost-effective way to ensure they’re happy with the entire customer journey.

Retained customers are likely not to have purchased from a competitor yet – but that doesn’t mean you’ve won them over. Therefore, their loyalty to your brand is still at risk.

Why is customer loyalty and retention important?

Retention is vital because you want newly acquired customers to stay with you for future purchases.

Loyalty and retention have several benefits, including…

Higher average order value

With a high customer retention rate comes customers that can trust you and your products. This could increase your average order value since they enjoy the service they’ve already received and want to see more.

Increased profits

Your profits are likely to increase since loyal, long-term customers are more likely to try more of your products due to previous customer satisfaction.

Better relationships with brand ambassadors

Word of mouth is still considered one of the most effective marketing strategies. Loyal customers will boost business by telling their friends and family how much they enjoy your brand. This can bring in more customers and further increase your profits.

More cost-effective to sell to existing customers

Retaining customers is cheaper than finding new ones. If you can continuously offer a product that customers have previously purchased from your business and enjoyed, your profits may sharply increase.

The cost of marketing to new customers can be expensive, so focusing on the people who have already used your services can be crucial to saving money while increasing profit.

How to build customer loyalty and retain customers

Now that you’re clued up on how loyal and retained customers can benefit your business, it can be helpful to know how to achieve this customer base.

Here are five of the best ways to build yours…

1. Exceed expectations

Satisfying your customers is one thing – but creating a memorable experience with the best service and products? That’s an entirely different game.

Exceed your customers’ expectations by going above and beyond wherever you can. Whether you offer free shipping on large items that would normally have a hefty shipping fee attached or give your customer service team some extra training on providing a winning service every time – you should always ask yourself how you can do better.

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2. Create a roadmap for the future of the relationship

In any relationship, there usually comes a time when somebody wants to know where it is going and wants to create a plan.

The customer-business relationship is no different – customers will want to know about anything they should look out for, such as future loyalty schemes and new products. If you keep your customers excited about new milestones and goals to hit, both parties can comfortably remain in the relationship.

3. Deliver confident service

If your service is confident, your customers will feel reassured that you can handle anything. Customer relationships are built on the confidence they can place in your business and your products.

The best way to build this confidence? Make statements exuding conviction, such as I can handle it and I have the solution.

If these statements are made on your site and by your customer service agents when handling queries, you could see huge increases in loyalty and retention rates.

4. Ask for feedback and act on it

Want to know why customers are abandoning their carts or how they feel about their buyer experience? Ask them.

The best way to do this is to collect customer reviews to find out what your business does well and what could be improved. By taking a proactive approach to any issues cropping up in your customer service strategy, you’ll prevent customer drop-off rates and ensure customers don’t leave you for your competitors.

5. Resolve customer queries quickly and effectively

Be empathetic with your customer service and ensure that any queries are swiftly handled. Keep your average handling time low and your level of service high to ensure customers aren’t driven away by poor service.

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Measuring Customer Loyalty

There are many different metrics you must consider when measuring customer loyalty.

Here are our top four…

Repeat purchase rate – Divide the number of repeat customers by your total number of customers and multiply by 100 to find the percentage for your repeat purchase rate.
Net Promotor Score (NPS) – NPS is the grade point average determined by your customer’s perception of loyalty to your brand. Calculate yours by surveying customers and finding out which are brand advocates, and which are detractors. Subtract the percentage of detractors from the percentage of brand promoters to find the Net Promotor Score.
Customer lifetime value (LTV) – Each customer should have a lifetime value that grows through a business nurturing it over time. The more they want to buy and the longer they stay interested in browsing your products, the higher their lifetime value will become.
Loyalty programme redemption rate – Divide the total number of customers by the number of customers enrolled and actively participating in your loyalty programme to determine how successful it is.

What is a customer loyalty scheme?

Loyalty schemes are created by businesses to inspire customer loyalty. Whether you use points, a tiered system or something else entirely, these schemes are proven to be effective for bringing customers back time and time again.

For example, Costa Coffee runs a points system where you buy eight drinks and can redeem a free drink of any size. Their loyalty scheme is successful because it considers the wants of its customers and brings them back multiple times before offering them a gift. Therefore, they will make a profit alongside keeping their customers satisfied.

A good loyalty scheme will get your customers talking to friends and family about it and will hopefully bring in their business, too.

What is a customer retention programme?

Meanwhile, a customer retention programme is specifically aimed at bringing your customers back. Gaining repeat business can be tricky with so much competition out there, and programmes like these can easily set you apart.

Creating a subscription model offering exclusivity in price, products or service will go a long way to ensure your customer retention rate soars.

Customer retention rate formula

Calculating the retention rate – or CRR – is relatively straightforward. Follow the steps below to work out how many customers your business has managed to retain over time.

Firstly, you must subtract the number of newly acquired customers from the number of remaining customers at the end of the period you’re looking at. To calculate the percentage, you’ll need to divide that number by the total number of customers at the start and multiply the answer by 100.

The formula would look like this, for reference…

For example, if you had 100 customers at the start of the year and earned 20 new customers but lost ten by the end of the year, your customer retention rate would be 90%.

Once you’ve worked out the customer retention rate, you should consider conducting an audit of your lost customers to determine similarities in reasons for leaving or types of customers that churn.

Consider aspects that you could add to the sales process, such as qualifying questions or revising the buyer persona to better reflect the attributes of your loyal and returning customers.

Looking for customer service that speaks to your contacts? Gnatta makes interactions matter, delivering quality exchanges and quicker responses that meet your customers’ expectations.

Get in touch to find out more.