Customer Polygamy and the Economic Impact of Loyalty

When it comes to their relationship with brands, customers prefer to be polygamous. A recent study published by ICLP, a global loyalty consultancy, studied consumers in Australia and discovered that a whopping majority (97%) would cheat on their favorite retailer. The ICLP study, Deeply Devoted, looked at the psychological similarities between human and brand relationships and found that consumers are in less committed relationships with their favorite brands than ever before, with only 3% feeling devoted to their preferred retail brands.

While the numbers are shocking, the fact that customer loyalty is more elusive than ever is not a surprise. The question is how hard should you work to buck these trends? In the world of mobile shopping apps and effortless comparison shopping, how much should you invest to cultivate loyalty and repeat purchase? How do you measure the positive impact that loyal customers deliver?

The best way to measure the impact of your best customers is to calculate their lifetime value (CLV) with your brand and compare that lifetime value to the average lifetime value of the rest of your customer base. It should be noted that lifetime value is a forward-looking metric. That means that to calculate lifetime value you need to estimate the future cash flows that you will receive from a customer. CLV is measured by looking at purchase frequency, average order value, and propensity to churn. To calculate CLV you can channel your inner statistician, or you can let a customer analytics solution do it for you. If you’d like to learn more about CLV, check out the Custora U courses on the topic.

Using lifetime value as the means to separate your higher value from your lower value customers, you can begin to look at differences in other key areas to get a full tally of the impact your best customers have on the business. A Bain report, “Calculating the Economic Impact of Customer Loyalty,” suggests you look at the following variables:

Retention rate. Look at the average length of time that your star customers stay with your brand. See how that compares with the rest of your customer population.

Pricing sensitivity. Examine how often your best customers buy items on sale and the price point of the items that they purchase. Look at their purchases over the past 6–12 months, and calculate the gross margin generated vs the average gross margin in your business.

Annual spending. Look at how the spending levels of your best customers accelerate over time. Compare that acceleration to your average shopper.

Cost efficiencies. Calculate the ratio of CAC (cost to acquire) high value customers to their CLV (customer lifetime value). Compare this ratio to the CAC:CLV ratio for your average customers.

This analysis can help you measure the economic benefit delivered by your best customers. With this number in hand you can be confident in knowing how much to invest in new technologies and programs geared to finding and developing high value customers.

Now if you don’t want to do this calculation yourself, we have scoured the web to find all the best stats on the value of customer loyalty. You can use these numbers to help you determine the incremental value that you receive from your best customers.

  • The top 5 to 10 percent of customers usually drive half the business (Demandware 2016)
  • New and unfamiliar customers make up 92% of shoppers (Adobe Loyal Shoppers Report 2013). And these new customers make purchases based on unsustainable things like are you the cheapest? And are you offering a promotion?
  • An average of 41% or revenue comes from existing customers (Adobe)
  • The cost of bringing a new customer to the same level of profitability as an old one is up to 16x more (Social Annex)
  • 80% of brand switchers feel the company could have done something to retain them (Accenture)
  • Only 13% of shoppers are loyalists, and 87% are shopping around (McKinsey)
  • Acquiring new customers is anywhere from 5 to 25 times more expensive than retaining existing ones, depending on your industry.
  • Increasing customer retention by just 5 percent boosts profits by 25 to 95% (Bain & Co.)
  • In apparel e-tailing, new customers cost 20% to 40% more for pure-play internet companies than for traditional retailers with both physical and on-line stores. That means that losses in the early stages of a relationship are larger.
  • A 2015 study by Vision Critical found that 42% of Americans will stop shopping with a brand after just two bad experiences
  • According to McKinsey & Company 25 to 50 percent of  brand’s highest spending customers also shop with its competitors.
  • A Harvard Business School study suggests that a company’s highest spending customers are also the most likely to check out other brands. These big spenders are the quickest group to look elsewhere when they believe their relationship with a brand is going awry.
  • Research by Rosettta Consulting found that engaged customers are five times more likely to buy only from the same brand in the future.

I am sure that your brand invests a lot of marketing resources to acquire new customers, but it’s a losing game when those customers don’t stick around and make repeat purchases. So if churn prevention is so important, why aren’t you doing more about it? Are you struggling to get a unified view of your customers? Having difficulty identifying when customers are beginning to drift from your business? Challenged executing programs that have a meaningful impact on retention? Not able to get the funding and executive support you need? Can’t get beyond a one-size-fits-all business rules email campaign approach? In our next post we’ll share new strategies being pioneered by cutting edge retailers that are surprisingly effective at reducing churn and building customer loyalty.

 

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