What Is Customer Loyalty?

Eric Goldschein
Eric Goldschein  |  September 16, 2019

Businesses that want to make money need to consider how good they are at two things: acquiring customers and convincing those customers to stick around.

When you get a customer to buy from you regularly, that’s called customer retention, or customer loyalty.

Customer loyalty is when someone chooses your product or service over that of other options. They might do that for any number and combination of reasons: you offer the best product, have the best prices, offer the best customer service, or deliver a fantastic experience. Your goal as a business owner is to always have your customers coming back for more.

Why is loyalty, or retention, so important? Loyal customers are more profitable for a business than new ones. According to a Bain & Company report:

“Across a wide range of businesses, customers generate increasing profits each year they stay with a company. In financial services, for example, a 5% increase in customer retention produces more than a 25% increase in profit.”

So how do you engender feelings of loyalty in your customers? It’s not as simple as saying “Come again!” as they leave your store.

The first step is to understand what customer loyalty does for your business. The second step is to create a multi-faceted plan to make people more loyal. Then you need to put your plan into action with tools and systems in place to cement your effort.

Let’s start with explaining why customer loyalty is worth caring about...beyond the numbers.

Why customer loyalty is important

As we’ve already established, building a loyal customer base is better for your bottom line than seeking and acquiring new customers. But how does your business save money from accruing loyalty? What’s to say a new customer won’t arrive in your store and buy just as much as a returning one?

Understanding your customers and building relationships with them to increase loyalty impacts your business in a few key ways, including: increased sales, a larger email subscriber base, and a bigger and better brand.

Increased sales at a lower cost to you

Think about all the cost and effort it took to get your first customer, your first 10 customers, even your first 100. Much of the effort that it takes to retain a customer, as we’ll get into below, is automated and cost-effective. According to HBR, sales statistics show that it costs anywhere from 5-25 times as much to acquire a new customer as it does to retain an old one.

Larger email subscriber base to market to

Many of the most successful marketing efforts require access to people’s email address, so you can send them targeted and high-converting messaging. You’ll obtain email addresses with online sales, or by offering a deal for signing up for your newsletter. Social media and other marketing efforts have their place, but email marketing has the highest ROI of any digital marketing tactic.

A bigger, better brand

Loyal customers will help build your brand through word-of-mouth marketing, and tend to stick to your business through thick-and-thin – social media snafus or the occasional customer service gaffe (read: not frequent – never take your customers for granted) aside.

You probably had a good idea of how important customer loyalty was coming into this article. Let’s talk about how to build that loyalty among those who cross your path.

How to create customer loyalty for your business

There are two ways to think about customer loyalty. That’s the frequency with which they shop with you, and your share of their wallet that you take up. Both avenues require different (though often overlapping) mindsets, tools, and systems.

Customer frequency

This is a measure of whether your customers will shop again, and how often they do so. Your goal should be to get the customers who shop with you to do it a lot.

One way to measure customer frequency is through churn rate, which tells you how many of your customers leave and don’t come back. This is easiest to measure if you run a subscription-based business, but you can also see if a certain customer didn’t return after making their first purchase, or hasn’t visited your page in a while after shopping with you regularly for some time.

Identify customers that haven’t shopped with you for some time and send them a follow-up email or text message with an offer enticing them to come back, such as a limited-time discount or free shipping. You can also send them different types of targeted messages that tell them that you’ve noticed they haven’t visited you in a while, or that you have new products they might love.

Share of wallet

Unless you’re Google, you’ll have real competitors in your space. Share of wallet is how often customers shop with you as opposed to those competitors. Do your customers love you more than anyone else who can offer them something similar?

To box out your competitors and increase your share of wallet, customer loyalty programs that encourage them to buy certain dollar amounts of your product or service will encourage them to max out their share of wallet dedicated to what you sell.

Starbucks’ VIP program is a good example of that. Their loyalty program is no longer just about buying a small coffee every once in awhile and then getting rewarded with another small coffee. Buy big-ticket items, exhausting your “coffee and snacks” budget, and you’ll gain rewards. Of course, you’ll have to make the reward worth their while, but the ROI you’ll get in the form of their share of wallet will pay dividends.

Providing an excellent customer service experience is also a huge part of securing a larger share of a customer’s wallet. When a customer knows that they’ll be able to initiate a return easily if they’re not satisfied, or will get help from your team in case of an issue, they’re much more likely to prefer you to a competitor who doesn’t make that effort.

Will customer service make someone buy a product more frequently if they don’t need that product? Probably not, but it will encourage them to buy from you, and only you, when they do want what you sell. 

What customer loyalty tools you need to get started

Wouldn’t it be great if all you needed to do to get a customer to be more loyal to your business was to give them a firm handshake and a smile every time they made a purchase from you? Unfortunately, between the fact that you might run an e-commerce business and the many options out there these days for customers, you’re going to need some help.

A few key investments will help you start building stronger relationships with customers, bonding them to your business and helping you save money in the long run. They include CRM software, POS systems, email marketing software, and loyalty programs. 

Customer relationship management (CRM) software

CRM software gives you a look into a customer’s lifecycle with your business, from the first time they came into contact with your business to today. That includes the status of their orders, your customer service history with them, and whether it’s time to send them a follow-up email or give them a call. 

View the Easiest-to-Use CRM Software →

A sophisticated point of sale (POS) system

A modern POS system, whether it’s your cash register at your brick-and-mortar store or the merchant services provider that processes a customer’s online payment, can help you build loyalty among customers. Some POS systems come equipped with loyalty programs or can help you collect email addresses so you can follow up with a new customer right away. 

Find the best POS software on the market. Discover Now, Free →

Email marketing software

A multitude of great email marketing software providers out there will help you craft a variety of timely, targeted, and automated emails to customers at different points in your marketing funnel. 

See the Easiest-to-Use Email Marketing Software →

Loyalty programs

Whether they’re a part of your POS system or a third-party platform that you engage with, loyalty program providers help you give customers the most bang for their buck while helping you stay solvent and glean helpful data from each purchase. 

TIP: Learn about the seven main types of loyalty programs and how to utilize them for your business.

Some of these tools and systems are intertwined: you can get a POS system with a loyalty program, or a CRM with email marketing capabilities. You can also integrate many industry-leading tools so you aren’t siloing your information and missing out on key insights.

It may be helpful to find an all-in-one solution, but the most important thing is to get moving on encouraging customer loyalty, whichever is most helpful, affordable, and doable for you. Don’t get bogged down in overthinking.

Customer loyalty: the last word

Remember, customer loyalty isn’t just a buzzword, and it doesn’t stop at giving customers a punch card for a free drink after they purchase 10 anymore. Customer loyalty provides you with a lower cost way to boost sales and build your brand, while giving you more time to focus on other aspects of your business.

Best of all, when done right, your efforts will make for happier and more satisfied customers. It’s one of the few areas of business where an investment in operations is a win-win for all parties. Get started today. Your future self, your bottom line, your team, and your customers will all thank you. 

Want to learn more ways to appease your customers at every juncture? See our 101 customer service statistics to better understand your customers' mindset. 

Learn more: 101 Customer Service Statistics for a Better Customer Experience →

Eric Goldschein
Author

Eric Goldschein

Eric Goldschein is a staff writer at Fundera, a marketplace for small business financial solutions. He covers entrepreneurship, small business trends, finance, and marketing.