What is Customer Loyalty and Why Does It Matter?

What is customer loyalty? Can the relationship between a business and its customers be well-defined? And, if it can be, is it valuable to do so? Customer loyalty can be complex, but research, as well as examples from well-known brands, can tell us what customer loyalty is, and that it matters. A high level of customer loyalty can make the difference between a future-minded, healthy business and one just scraping by.

What Is Customer Loyalty?

Customer loyalty can be defined as buyers’ support for or allegiance to a brand or business. There are multiple levels of customer loyalty, and it can arise from a number of sources.

Types of Loyal Customers

At the lowest level, customer loyalty may simply be a reduction of obstacles and doubts, so a customer repeatedly chooses a brand or business because it is easiest and most convenient. At a higher level, a customer may support a brand or business because they’ve had a positive experience; a staff person was very friendly, a problem was resolved quickly, or the product worked even better than expected. At the highest level, a customer may have all of these things—no obstacles or doubts, and a positive experience—and the brand supports causes in common with the customer, or creates an image the customer relates to.

Another type of repeat customer, the captive customer, may not actually be loyal or even feel positively towards the brand, despite making repeat purchases. These customers feel that they have no alternative, but still need the product or service, and would probably leave the business if a viable alternative appeared.

Types of repeat or loyal customers

Convenience customer: The business is fast, easy, and convenient, producing little or no barriers or obstacles. This might be a fast food restaurant, gas station, or online store.
Happy customer: An experience with the business produced a positive impact on the customer. Businesses that prioritize customer service, such as Trader Joes or Ritz-Carlton, are known for their happy customers.
Emotionally invested customer: This customer may also fall into the previous two categories, or might not. This customer relates to a brand’s image or charity work, and supports them on these grounds. These customers can become valuable super fans, and are commonly seen in businesses or franchises that create a powerful image, such as Harley-Davidson, or those that take part in powerful good-works projects, such as TOMS shoes or Patagonia.
Captive customer: This person might not be happy, and might actually feel negatively towards the brand, despite making repeat purchases. This often occurs in natural monopoly situations, like internet providers and airlines, where few alternatives exist and those alternatives are seen as equally bad or worse.

How Important is Customer Loyalty?

Customer loyalty is an indicator of the state of your customer base. It can show you whether your customer base leans more towards new customers, existing customers, or brand evangelists who have been with you for a long time. Customer loyalty can also indicate success or problems in other areas, like profit. The following are just a few of the many correlations studies have found between customer loyalty and a successful business.

A 5% increase in customer retention correlates with at least a 25% increase in profit. (Bain & Company)
Members of a loyalty program spend 12 to 18% more annually than customer not in a loyalty program. (Fundera)
An estimated 20% of your customers are responsible for 80% of your profits. (Gartner Group)
Repeat customers spend up to 300% more than new customers, and each order tends to be larger. (RJ Metrics)

Logically, these correlations make sense. When a customer makes a purchase, you’ve already overcome most of their doubts about your product and interference from competitors. This creates a path of least resistance when a customer needs or wants the product again. Unless something changes their mind—a better competitor offer, perhaps, or a bad customer service experience—why wouldn’t they purchase from you again?

How to Measure Customer Loyalty

Since customer loyalty and customer satisfaction correlate with important business metrics, it’s helpful to have tools for measuring them. Experts have developed several survey questions and methods to measure customer loyalty as a number or percentage. This takes an abstract concept like customer sentiment and turns it into a quantifiable number you can compare year over year. These measurements include CSAT and NPS^®. It’s important to remember that these tools will help you measure customer loyalty, but they wont’ show why your customers are loyal or not. You’ll need carefully crafted follow-up questions to figure this out and derive actionable data.

How to Leverage Customer Loyalty

Businesses of all sizes have effectively turned their customer loyalty into valuable assets. With 97% of people reading online reviews before visiting a business or making a purchase, and 84% of consumers trusting online reviews as much as family and friends, it’s clear why a strong following can have a business impact. Studies have also shown that happy customers will refer about 11 people to your business, while angry customers will steer about 15 people away. This indicates that strengthening your following and showcasing it can help you bring in new customers.

Here are a few ways to get even more out of your loyal following

Share customer videos testimonials on your social media
Give customers rewards for sharing their experiences online
Create an online video or commercial around a particularly outstanding customer experience
Encourage loyal followers to leave reviews where other potential customers can find them
Start a referral program, so your happy customers can easily recommend your business to their friends or family

One of the greatest benefits of having high customer satisfaction and a loyal customer base is word of mouth. Customers will share their sentiments with like-minded friends and family, spreading the word about your business without costing you a dime. However, be careful to monitor your customers carefully. Loyal customers often have high expectations, and you’ll have to maintain stellar customer service to keep them.