Customer loyalty is an intangible but extremely valuable company asset, the ability to effectively measure and model customer loyalty is an essential element to achieving your goal of retaining and expanding customer relationships.

We were recently asked, “Do you need to measure loyalty if you are measuring retention �" aren’t they the same thing?”

In this blog we explain how these elements are different and related, and provide best practices for modeling and measuring loyalty.

The Difference between Loyalty and Retention

Retention is a measure of whether an existing customer continues to do business with you. Loyalty measures a customer’s predisposition to select a business entity as a preference, and indicates a certain resistance to competitors.

Loyalty is a behavioral disposition that suggests that a customer will consistently respond favorably toward a brand/company, and also suggests the willingness to engage.

This distinction is important. A customer who continues to do business with you may be retained, but not necessarily loyal.

How to Model Loyalty

Responding favorably covers a lot of territory �" from passively choosing to remain a customer, to actively choosing to advocate for a brand/company. Therefore, measuring retention, once you define what a customer is in terms of tenure, is a matter of counting. Loyalty takes a bit more sophisticated measurement and needs to take into account three potential behavioral responses if you are going to use the concept to build a model:

• Expansion �" the likelihood the customer will increase their level of business, e.g., purchasing more of the same product or other products in your portfolio
• Influence �" the degree to which they can be influenced by the company in a way that positively impacts the company, e.g., seeking out advice, paying online, complying with new policies
• Advocacy �" the extent to which a customer is willing to actively promote the company, e.g., online reviews, supporting the company’s position on an issue, participation in case studies, serving as a reference, or making referrals.

Note: The Net Promoter Score (NPS) methodology attempts to account for these 3 behaviors, but the primary goal of this score is to help you ascertain the number of promoters vs. detractors.

You will want to determine which of these behaviors (it can be all of them) best define loyalty for your company. If you don’t know, answering these five questions will help you get started:

1. What is the ideal customer for your company? What do they do/not do? What does a less-than-ideal customer look like?
2. What does your company want from its relationship with customers and why?
3. What can customers do to support the company’s mission?
4. What can customers do to help the company improve service and reduce the cost to serve?
5. What can customers do to reduce your cost of doing business with them?

You may want to engage a number of stakeholders in conversations around these questions. Once you determine the behaviors that define loyalty, you can build a model and begin to measure loyalty. It may be necessary to take different customer segments into account, and as a result you may need more than one model.

To validate the model, you may need to conduct some research with customers who meet the loyalty criteria as well as customers you believe do not. Then, set about defining how you will use the model to measure and improve loyalty.

By distinguishing retention from loyalty you can begin to understand the customer experiences, interactions, perceptions and attitudes that drive and impact loyalty. Ready to get started? Do-it-yourselfers can purchase our workbook

“Leveraging Eight Key Metrics for the Customer-Centric Organization.” Or, if this is a strategic initiative, time is of the essence, or you need an objective third party, contact us to discuss your goals and timeline.

Laura Patterson is president and co-founder of VisionEdge Marketing, Inc., a recognized leader in enabling organizations to leverage data and analytics to facilitate marketing accountability. Laura’s newest book, Marketing Metrics in Action: Creating a Performance-Driven Marketing Organization (Racom: www.racombooks.com ), is a useful primer for improving marketing measurement and performance. Visit: www.visionedgemarketing.com       

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