How to Improve Customer Loyalty for Your Small Business

10+ min read • Jul 27, 2020 • Derek Miller

For many business owners, customer loyalty is the holy grail. Loyal customers increase revenue through repeat purchases and referrals. 

While customer loyalty is valued, it’s hard to find. Customers have become increasingly fickle and aren’t afraid to abandon brands for any number of reasons, including poor service, better perceived value elsewhere, or mere curiosity. 

Companies, on the other hand, often unwittingly contribute to this problem by scaling back benefits to reduce costs—and reducing the reasons for customers to remain loyal as a result.

It is possible to build a healthy supply of loyal customers without sacrificing profitability. In fact, by prioritizing activities designed to increase customer loyalty, you not only retain more clients—you also bring in new business based on your increased reputation and resulting new referrals.

This guide will explore what it means to have brand loyalty in 2020. What brand traits make customers the most loyal? How can your business harness them? And, most importantly, how can companies track the effects of their loyalty efforts? 

The answers to all of these questions can help your brand create a roadmap to increase customer loyalty over the next several years.  

Measuring Customer Loyalty

One of the biggest hurdles to customer loyalty is understanding how to measure it—but make no mistake, customer loyalty isn’t abstract. There are targeted metrics that you can track to determine how much your company benefits from customer loyalty and where there is room to grow. 

The first metric to consider is the new customer ratio, which is the percentage of new customers to your brand compared against returning customers. A company with too many new customers will have higher marketing and acquisition costs. 

While investing heavily in customer acquisition is natural for startups, the number of loyal customers for your brand should grow over time. Conversely, a company with too few new customers will likely stagnate in growth. Repeat business can only take you so far before you start to plateau.

Optimove tracked the optimal new customer ratio for businesses. Young, fast-growing companies can benefit from a new customer ratio of 40–70%. More established companies will still be considered healthy if their new customer ratio ranges between 20–40%. However, these ranges will differ by industry. Even if you are an established brand, you may need more than 40% of new customers to maximize your profits.  

The next metrics to consider are the conversion rates and average order value (AOV) for returning customers. Statistically, a repeat customer is significantly more likely to convert. Some studies have found that repeat customers will convert 60–70% of the time, compared with a 3% change for new customers. This high conversion rate drives up your return on investment, as your marketing efforts to existing customers are more likely to pay off. 

Returning customers also spend more. Your top 10% of customers spend 3 times as much as your bottom 90%, increasing your average order value for your top customers. This follows the 80–20 Pareto Principle, which states that 80% of your business comes from 20% of your customers.

Your goal as a business owner is to maximize profits from your top customers while driving new customers to reach that same level of loyalty. 

The final metric to track as you evaluate the health of your business is the customer lifetime value (CLV). This follows a simple formula:

  • (AOV) x (number of purchases annually) x (time)

For example, a coffee shop might only have an AOV of $5, but if a customer stops in 5 times per week on their way to work, that customer’s annual value is $1,250 over 50 weeks.

Some companies will track CLV over 5 or 10 years. They know that customers will stay loyal for a set period and spend more over the course of their relationship with the brand. However, these relationships end—and new customers step up to fill the holes. 

Once you know your customer loyalty metrics, you can take steps to improve them. You can grow your new customers or take steps to get your loyal shoppers to spend more. This insight allows you to take control of your marketing to make your business profitable.   

Strategies to Increase Customer Loyalty

There are many options available to your brand to increase customer loyalty. You can test out different techniques and form policies that work best for your industry and target audience. 

Remember: what works for one brand might not work for another. Make sure you develop strategies that reflect your brand values and meet the needs of your customers. 

Improve Your Customer Service

Good customer service is one of the most important aspects of brand loyalty. Studies show that 67% of customer churn is preventable with good customer service. Most customers will stand by your brand until you give them a reason to change. If you offer poor customer service or aren’t able to solve their problems, then your customers will find someone who can.   

Develop Loyalty-Focused Business Models

Some business models are more loyalty-centric than others. For example, most people will stay with their gym for several years because they have a monthly membership. Some gyms offer discounts for customers who pay several months in advance or annually. This ensures a stream of income—and loyalty—for the fitness center. 

This same principle underpins subscription services or monthly box subscription companies. By creating a business model around automatic, ongoing purchases, you’re perpetuating brand loyalty.

Beyond subscription business models, you can also offer bundle pricing or packages that provide multiple purchases at a discounted rate. This technique is often used by service companies such as massage therapists, who typically sell several sessions at once.  

Look for ways to encourage customers to pay ahead or set up automatic payments to grow their loyalty and increase the financial stability of your business. 

Offer Discounts for Returning Customers

Marketers used to treat the sales process as a funnel, moving customers from the beginning awareness stage to the final purchase point. However, modern sales teams use the sales cycle: the idea that the marketing process renews once the initial purchase is made. Customers are constantly passing through some part of the sales cycle as companies work to re-engage them with the brand.  

One way to turn new shoppers into loyal customers: a discount incentive on their second purchase. Consider offering a coupon to customers who complete their first purchase. If they are happy with your brand, the discount can entice them to return sooner.

Encourage Customer Referrals

Customer referrals combine the power of word-of-mouth marketing—one of the most trustworthy forms of promotion—with brand loyalty. Not only do referrals typically convert at a higher rate (3–5x higher than other channels), but the customer doing the referring will likely be more loyal after recommending your brand.

With a typical referral program, the new customer receives a discount or gift for disclosing who referred them. The referrer also benefits by receiving a significant discount or compensation.

For example, a dentist might have a referral program where existing patients can save $30 on future services for each new patient they refer. The more new patients that person recommends, the more they save, increasing their loyalty to the dentist. The dentist benefits by growing the practice’s customer base. 

The referral program highlights the importance of customer lifetime value. While a $30–50 discount is steep for most businesses, the amount that the new customer will spend over the next few years is more than worth it.

Set Up a Loyalty Program

The most common strategy to grow your customer loyalty is with a loyalty program. These programs exist in various formats, but they all have the same goal: to continue engaging customers with your brand over your competitors. Below you can find more details about setting up your loyalty program to be both effective and profitable. 

Using Customer Behavior to Develop a Loyalty Program

As you develop your customer loyalty program, focus on what keeps customers coming back. A few years ago, almost every company from Red Robin to Kohl’s was developing loyalty programs. 

Customers would sign up for these programs at first, but few would stay with them long enough to collect any value. In fact, a survey of 1,000 consumers conducted by Kobie Marketing found that 75% of consumers actively participate in 3 or fewer loyalty programs.  

Without the right insight, you could have a loyalty program full of “ghost members:” people who signed up once (likely to get a discount) and then never returned. These shoppers aren’t tuned in to your brand messaging and aren’t going to take advantage of most member perks. 

Reduce Barriers to Entry

Start by making sure your loyalty program is easy to join. The same Kobie Marketing survey found that 26% of consumers won’t sign up for a program if the company requires too much information or the process takes too long. Even if a customer is loyal to your brand, they might not feel comfortable giving you their personal data. 

Customer demand for simplicity is why rewards programs like punch cards have stood the test of time. You can easily order hundreds of punch cards and hand them out to customers. Those who are loyal to your brand will use them and redeem the discounts or services offered after a certain number of visits, while those who aren’t loyal won’t use the card. This approach is a simple and affordable option for many small businesses.  

If you want to make your loyalty program more high-tech, consider looking into software tools like Square. Customers don’t need to complete a separate enrollment process—instead, they can link points to their credit cards or phone numbers when they purchase. This simplicity makes enrollment easy and allows your employees to sign up customers at the point of sale. 

Simplify the Rewards Process

Along with lowering barriers to entry, make sure your customers can easily understand how to earn rewards. 

“Too often brands try to spice up their program by adding new rules and complicated conditions,” Kirsten Burkard explains at Smile.io. “Instead of generating excitement, it just frustrates shoppers, making it difficult for them to engage with the program.”

This demand for simplicity is why so many rewards programs are based on points. Once a customer earns a certain number of points, they either earn a free item or a significant discount. Customers can easily track their points and know how to earn them, making the whole process clear. 

Make the Rewards Relevant

Even if your rewards program is easy to join and customers can collect rewards quickly, you may not see the engagement you want if the rewards aren’t relevant or enticing. 

For example, a salon and spa might offer a free wax treatment for customers after a certain number of visits. However, this isolates customers who don’t use the waxing services. Patrons who are only interested in hair and nail treatments have no reason to work toward a reward. 

Panera Bread has a strong rewards program based on customer behavior. If a customer earns their points through coffee and pastry purchases, they are likely to earn a free drink or cookie. Another customer who orders savory food is more likely to earn a free meal. This flexibility ensures that the rewards are relevant—and that customers are actually interested in earning them. 

You can determine the effectiveness of your loyalty program by tracking the percent of customers who sign up and the percent of customers who redeem rewards. These 2 metrics highlight how useful your loyalty program is and whether or not it needs to change. 

Understanding Customer Loyalty in a Crisis

Your customers may stay loyal to your brand during the best of times, but what about the worst of times? Loyalty depends on you. If there is one takeaway to understand what makes customers loyal, remember that shoppers reflect the behavior of the brands with whom they engage. 

To increase loyalty during a crisis, start with communication. Understand what your customers need to hear and provide the answers they need. If your customers can’t get answers from your brand, they will find them from somewhere else. 

During a crisis, like the coronavirus pandemic, don’t be afraid to take a moral stance with your brand and make decisions that follow a purpose other than just profits. In fact, a recent study from Smart Insights found that 64% of customers actually trust brands more when they deliver on societal issues, not just products. The findings suggest that customers trust brands more for taking a moral stance and are increasingly loyal to these companies.

We’ve already seen many brands come under fire during the COVID-19 pandemic for the way they handled the crisis. For example, Ruth’s Hospitality Group caught public backlash for acquiring a $20 million federal loan while thousands of small businesses were left unfunded during the first round of PPP loans.

There are 2 types of brands during a crisis: those who worry about losing customers and those who want to help them. Customers are more likely to remember brands that helped during a crisis and will stay loyal long after the threat has passed.

Any brand—regardless of industry, age, size, or products—can build customer loyalty. The best part: you don’t even need a complex loyalty program. Good customer service and a dedication to fair pricing can put you far ahead of your competitors. 

The more loyal your customers are, the more they’ll spend and the more they’ll recommend you to others. Knowing this value, brands should prioritize the activities that lead to increased customer loyalty.

Consider how your brand can increase customer loyalty and take steps to improve it this year. The investments you make today could continue to pay off for years to come. 

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Derek Miller

Derek Miller is the CMO of Smack Apparel, the content guru at Great.com, the co-founder of Lofty Llama, and a marketing consultant for small businesses. He specializes in entrepreneurship, small business, and digital marketing, and his work has been featured in sites like Entrepreneur, GoDaddy, Score.org, and StartupCamp.