Why is loyalty important to retailers?

What is Customer Loyalty?

Loyalty refers to a customer’s commitment to a retailer where they repeatedly buy their products/services instead of competitors. Loyal customers help a retail business grow and become more profitable because they are only acquired once and spend more over time.

Types of Customer Loyalty

Customer loyalty can fall into one of these categories:

Happy Customers

Happy customers are satisfied with a retailer and are not swayed by promotions or discounts—they love the retailer’s products/services, customer service, and shopping experience.

Happy customers become repeat customers (they buy more and are willing to pay a premium price) and actively share positive feedback about the retailer to friends and family. This advocacy is key to building trust with potential new customers.

Brand-loyal

These are customers who love a retailer and their values. Brand-loyal customers repeatedly buy from a retailer they are loyal to regardless of the changing price. They leave positive reviews, refer friends and family, and are unlikely to buy from competitors.

Price-loyal

These customers are loyal to a retailer because of low prices. If a retailer increases their prices, they leave them for another business with lower prices.

Convenience-loyal

A convenience-loyal customer values a retailer that communicates easily, is easy to find, and offers a seamless buying experience. They will remain loyal to a retailer that offers convenience even if the pricing is slightly higher.

Program-loyal

A program-loyal customer isn't loyal to a retailer or their products/services. They are loyal to a retailer's loyalty program because of the benefits it offers.

Reasons Retailers Should Cultivate Customer Loyalty

Here's how retailers can benefit from customer loyalty:

Repeat Customers Equals More Sales

One of the ways retailers benefit from customer loyalty is repeat sales. According to BIA research, on average, repeat customers spend about 67% more than new buyers, which means a higher average order value (AOV).

In addition to increased sales, loyal customers cost much less to retain than acquiring new customers, which helps reduce the cost of operating a retail business.

Referrals

Loyal customers are likely to include their favorite brand in their daily conversations. Also called word-of-mouth marketing, customer advocacy is free advertisement for a retailer, with statistics showing that about 92 percent of consumers trust recommendations from family and friends. 

Reduced Marketing and Advertising Costs

Loyal customers can help retail customers reduce marketing costs in two ways. Firstly, they keep coming back without additional marketing spend and second, they tell and bring their friends and family to the business.

Opportunity for Genuine Feedback

Loyal customers want their favorite retailer to succeed, so they provide valuable feedback and ideas for improvement. This can be critical to the future success of the business.

How to Measure Customer Loyalty in Retail

Here are metrics retailers can use to measure customer loyalty.

Repeat purchase rate

This metric measures the total number of repeat customers compared to the total number of paying customers. A higher repeat purchase rate indicates higher customer loyalty and vice versa.

Net promoter score (NPS)

NPS helps retailers understand customers' sentiments towards their products/services. It involves asking customers how likely they will recommend the business on a scale of 1-10.

Upsell ratio

The upsell ratio enables retailers to calculate the number of customers who bought different products compared to those who bought only one. If more customers are open to buying more products from a retailer, it typically indicates stronger loyalty.

Customer loyalty index (CLI)

CLI helps retailers measure how likely a customer will buy from the retailer again, recommend a friend, or how likely they will try other company products/services.

Purchase frequency

This metric measures how often customers return to purchase from a retail company. Purchase frequency is particularly important to understand to better forecast future sales.