Mistaking these for one another can drive customers away and become a costly fallacy
At first glance, they look pretty much the same, but as you move closer, you begin to notice the nuanced, but extremely important differences. Many brands and retailers view customer retention and loyalty as the same objective. Unfortunately, this misconception can be costly. Imagine offering your customers a 10% discount on their purchase as a retention incentive. Now imagine that your competitor down the street is offering a 15% discount on their purchase. Non-loyal customers will make their way to the steeper discount, resulting in $0 in sales. Some customers will opt for your business regardless for a number of reasons: loyalty, convenience, familiarity, rendering a 10% discount unnecessary. In this case, solely focusing on a retention strategy will likely result in a loss. Additionally, your retention plan does not distinguish what drives customer behavior, particularly for those customers who are opting for your brand regardless of price. Understanding customer motives is key in determining what offers to push and through which channels. To begin, let’s address the difference between loyalty and retention.
Retention measures purchase behavior for a customer population as a whole. For example, 32% of customers have made a purchase within the last year and are still active customers today. While this is an important metric, it provides very limited information and can prompt allocation of unnecessary marketing dollars that would be better spent elsewhere.
Loyalty, on the other hand, measures an individual customer’s behavior. This not only includes purchase behavior, but it also considers the items they have purchased, engagement on different channels (e.g. social media, web, email), basket size, etc. While this is more difficult to measure and involves aggregating information from multiple data sources, it paints a more robust picture of the individual customer and can provide insight into the most effective marketing strategies and channels.
Loyalty and retention go hand in hand. A brand cannot build loyalty without retention, but it also cannot retain customers for an extended period of time without building loyalty. However, a retention strategy differs significantly from a loyalty strategy.
Retention strategies focus on stopping a customer when they’re already on their way out the door. Monetary incentives drive retention strategies. While this may stop a customer from making a purchase elsewhere in that instance, it does not guarantee that they will return. This targets the customer who makes purchase decisions based on price and convenience. Additionally, monetary incentives make a customer vulnerable for acquisition from a competitor with a lower price.
This should not be confused with loyalty. The primary focus of loyalty is enhancing customer behavior, and a loyal customer will return to your business regardless of whether your competitor is offering the same product at a lesser price. It is best to think of loyalty as a component of the relationship marketing strategy. The goal of the relationship marketing strategy is to create an emotional connection with the customer so that your competitor’s monetary retention strategies do not sway your customer’s loyalty.
Measuring Your Strategy
A customer can be retained, but still not be loyal to your business. Therefore, when measuring ROI of a loyalty program, purchase behavior should not be the only measurement. While purchase behavior may appear to be what drives your bottom line, the more important metric to consider is customer lifetime value (LTV). This metric particularly demonstrates the importance of the relationship marketing strategy as it incites desired customer behavior over time. There are a variety of equations that can be used to calculate LTV ranging from simple (e.g. expenditure x customer lifespan) to a customized equation based on the metrics most important to your business. Below are a few constants to get started on determining how you’d like to evaluate LTV: * Average Customer Lifespan * Customer Retention Rate * Profit Margin per Customer * Rate of Discount * Average Gross Margin per Customer Lifespan
Retention strategies rarely move the needle on these constants, and many actually rely on the efficacy of your loyalty program. While these constants may individually drive the bottom line, LTV puts a more holistic view into perspective for your marketing team. For example, LTV shows that you are not attempting to sell a $4 cup of coffee, but you’re rather attempting to acquire and maintain a customer worth $10k over his/her lifetime. This perspective can dramatically change a strategy and clearly aligns with the relationship marketing strategy mentioned earlier. When it comes to LTV, loyalty > retention.