Measuring Customer Loyalty and Retention with KPIs

Customer loyalty plays a fundamental role in a business’s success. It can be measured in many ways depending on the business model. Overall customer loyalty refers to customer retention, such as the number of customers that do repeat business / purchases. However, in today’s competitive markets customer loyalty also refers to brand perception, behavior and attitude towards the brand as well as actions taken towards the business such as online reviews, word of mouth etc.

Below are some best practice KPIs to help measure customer loyalty and provide guidance for an in-depth KPI analysis. This will help to identify if customer loyalty is a problem and will provide insightful knowledge to make informed strategic decisions on how to improve customer loyalty.

Customer loyalty and retention KPIs

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A guide to the analysis is given in section 1 with the main KPIs to be analyzed. In section 2 all KPIs are defined in detail with formulas and suggested time frames. This section gives advice on how to create more business-relevant KPIs.

Section 1. Customer Loyalty KPIs

Here are some fundamental KPIs for measuring the customer loyalty:

  • Customer Acquisition Rate
  • Customer Attrition Rate
  • Customer Retention Rate
  • Customer Wallet Share

These four KPIs will help the business to understand the fundamentals of its customer relationship management.  It will be clear whether the business attracts enough customers, as well as retains them, whether the wallet share is significant and how many customers are lost.

An analysis over time of these KPIs will provide the fundamental knowledge for the business to understand its strengths and weaknesses and implement strategies to maximize success rate. The ideal scenario will be that the customer acquisition and retention is high, as well as the wallet share, and customer attrition is minimized.

Loyalty and retention dashboard

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Customer Loyalty In Depth KPI Analysis

In order to gain further understanding of the position the business holds in terms of customer loyalty, the following KPIs can be measured:

  • Customer Loyalty in terms of Perception/Behavior
  • Customer Participation
  • Customer Price Elasticity
  • Sales Increase due to loyal customers

These three KPIs will analyze the customer’s behavior towards the business, such as identify how many customers have a positive attitude and reflect it through positive reviews and word of mouth, among many other activities.  These KPIs will also bring knowledge regarding the customer participation in loyalty programs such as loyalty cards, registering on websites, email newsletters and so on.

The price elasticity is a valuable measurement of how loyal customers respond to increases in price. This helps to understand the brand perception. For instance, many powerful brands have created a high quality perception that their loyal customers are prepared to accept major price increases.

It is also important to understand the impact loyal customers have on sales and revenue, especially the positive impact.

Here is a best practice KPI to help identify the downfalls in managing customer relationships and retaining loyal customers:

  • Funnel Drop Off

The funnel drop off KPIs analyses the customers that drop out of specific engagement efforts. It is important to measure funnel drop off as part of a customer loyalty analysis, in order to understand how many customers drop out, why, and how this can be changed to help minimize this KPI.

Section 2. KPIs Definition and Formulas

Here are the KPIs discussed in Section 1, in detail:

Customer Acquisition Rate

This indicator is for measuring the customer acquisition rate. In other words, in measures the % of new customers acquired in a given time period.

Acquisition rate KPI details

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Formula:

  • Total number of customers acquired/Total customer base x 100
  • KPI Unit: %
  • KPI Time Frame: update annually

Acquisition rate update interval

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Customer Attrition Rate

This indicator is for measuring the customer attrition rate. In other words, it measures the number of customers attrited (lost), as a % of the total customer base, over a given time period.

Attrition rate KPI details

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Customer attrition is very important to companies, as it does essentially equal business loss.

Formula:

  • Total number of customers attrited / Total number of customers x 100
  • KPI Unit: %
  • KPI Time Frame: update annually

Customer Retention Rate

This indicator is for measuring the customer retention rate. In other words, it measures the company’s ability to retain customers. This is calculated by dividing the total number of customers retained, by the total number of customers, over a given time period.

Retention rate KPI details

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This KPI is the opposite of the Customer Attrition KPI, which measures customer loss.

Retention rate KPI formula

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The well known business norm is that a retained customer is much cheaper to the company than a newly acquired customer. Hence, companies aim to maximize this KPI, especially through CRM efforts.

However, some research advises on measuring cost of retained customer rather than number of retained customer. In the formula below we will use number of retained customers; however, the figures can be interchanged with cost, to obtain both measurements.

Formula:

  • Total number of retained customers / Total number of customers x 100
  • KPI Unit: %
  • KPI Time Frame: update annually

Customer Wallet Share

This indicator is for measuring the % of a customer’s budget for a product category, which is spent on purchasing that product from the company, over a given time period (e.g. annually).

The Customer Wallet Share is a very important element for any company, and there is a very high competition on all markets for companies to maximize this KPI.

Wallet share metric details

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For instance, a customer annually spends $1,000 on purchasing internet connection, $700 for home Wi-Fi connection from Company X and $300 for a 3G connection on Smartphone from Company Y. In this case, Company X has a 70% of the customer’s wallet share, whilst Company Y only has 30%.

If you are Company Y, you may set a KPI to increase that wallet share to 100% in the next quarter, by offering the customer a better joint deal on both home WIFI and 3G connection.

Formula:

  • Budget spent on your company product/ Total budget for the product x 100
  • KPI Unit: %
  • KPI Time Frame: update quarterly or yearly

Customer Loyalty in terms of Perception/Behavior

This KPI looks at brand perception and behavior towards the business. This is a more qualitative rather than a quantitative measurement, but it can be measured to some extent.

For example, the company may want to measure the % of positive reviews on the website, or the % of loyal customers that leave positive reviews.

You may also look at measuring new customers that come recommended by a friend – which is likely to be word of mouth from an existent loyal customer.  Surveys can also be a great tool to measure customer loyalty.

Customer Participation

This KPI measures the % of customers that take part in loyalty programs, as a % of all customers. This is measured over a given time period.  It helps businesses to identify the customer engagement levels, and try to tailor loyalty programs to attract more customers to take part in it, and ultimately increase customer loyalty ratios.

Customer participation metric details

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Formula:

  • Total number of customers participating in loyalty programs / Total number of customers x 100
  • KPI Unit: %
  • KPI Time Frame: update quarterly or yearly

Customer Price Elasticity

This KPI measures the price elasticity of loyal customers. In other words, it identifies the loyal customers’ likability to buy products that have increased in price and their overall behavior when a price increases.

Customer price elasticity KPI

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Formula:

  • Total number of loyal customers that purchased products with increases price/ Total number of loyal customers x 100
  • KPI Unit: %
  • KPI Time Frame: update quarterly or yearly

Sales Increase due to Loyal Customers

This indicator is for measuring the % increase in sales due to the acquisition of loyal customers, against the company’s total sales increase, in a given time period.

Sales increase due to loyal customers

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Companies can use it to measure the profitability that their acquired loyal customers bring to the business.

A more in depth analysis can also look at the return on the company’s effort and investment to retained customers. For instance, a company could compare the Customer Retention Rate with the Sales Increase Rate and identify any trends (e.g. proportionally growing).

As consumption can vary due to many reasons (season, time of the month, economic stability etc), a company may only use this KPI as definite after evaluating it over a time period, and taking into consideration other factors

Formula:

  • Total sales increase due to loyal customers/ total sales increase x 100
  • KPI Units: %
  • KPI Time Frame: update quarterly

Funnel Drop-Off

This indicator is for measuring the funnel drop – off rate. In other words, it measures the amount of customers that dropped –off the company’s promotion/engagement funnel.

Funnel drop-off metric

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Example of funnels would be company newsletters, loyalty cards, personalized emails etc. The funnel drop-off rate is the % of customers that have abandoned that funnel. For instance, a company that is sending monthly email newsletters to all their customers may experience a 20% funnel drop –off rate, where 20% of the customers have unsubscribed from the newsletter.

By monitoring this KPI the company can put into place strategies to minimize it, as it is essential to keep customers engaged in these funnels. Via the funnels the companies have a means of engaging and attracting the customers to their company products and services.

Formula:

  • Total number of funnel drop-offs / Total number of customers engaged in the funnel x 100
  • KPI Unit: %
  • KPI Time Frame: update quarterly or annually

Section 3. Build Further Relevant Strategic KPIS

Building further relevant strategic KPIs to measure the customer loyalty is a simple 3 step process:

1. Identify your mission, vision and objectives

  • What is the customer loyalty you want to achieve?
  • What represents success?
  • What is failure?
  • What are your competitors doing?
  • How does it impact on your business?

2. Create KPIs that are based on your objectives

3. Measure your KPIs and analyze them

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Oana Boteanu KPIs and Business Performance expert, she is a BA with Honours Management and Marketing graduate and has several years of experience working with performance management tools in employment performance and strategic performance. She also worked as a performance management online consultant at BSC Designer since from 2012 to 2013.

BSC Designer is a Balanced Scorecard software that is helping companies to better formulate their strategies and make the process of strategy execution more tangible with KPIs.

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