“A 5% improvement in customer retention rates will yield between a 20 to 100% increase in profits across a wide range of industries.”  (Reichheld, Fred. The Loyalty Effect.)

Loyal customers are an indicator of great businesses, but many good businesses could become great by focusing more effort on serving and retaining their existing customer base.

Do you currently measure customer loyalty?

If not, understanding your customer loyalty can help you predict which customers will continue buying from you, which customers are at risk of defecting and the steps you can take to prevent it.

To Measure Customer Loyalty, Start With Your Goals

There are a number of ways to measure customer intentions. Since this can vary widely depending on industry, market and market segments, the first step is to define your goals:

• What exactly do you want to learn?
• What’s the best method for getting the information you need?
• How frequently will you update the measurements?

Remember to focus on learning about intended actions rather than general feelings & opinions.  For example, many customers will say they are satisfied, but “satisfied” may not be good enough to get them to purchase from you again.  Instead, try to gather feedback that’s easier to act on, such as:

• Whether customers intend to purchase again
• Whether customers will refer other customers
• Who is dissatisfied and why
• Where you can improve
• How you can win their loyalty if you don’t have it

Start by generating a list of things you’d like to learn about your customers.  You want to understand your customers’ intentions, and you want specific, valuable responses. Here is a list to get you started:

• Are you completely happy with the product you purchased from us?
• How many times a year do you purchase ____?
• Do you sometimes purchase your ___ from another company?
• What’s most important to you when deciding to purchase our ___?
• Is there anything you would change about our ____?
• If you had a colleague with needs similar to your own, how strongly would you recommend our service/product?
• What could we do to add value to our offering?
• How can we improve our customer service?
• What things would you like to see us improve?
• What can we do to keep you as a customer for life?

Gather Customer Information

Next, choose your method for gathering information. Here are three common methods:

Survey: Good for gaining honest feedback from a group of customers. If set up correctly, surveys measure feedback more precisely than informal, open-ended communication.

Informal feedback: Good for gaining detailed feedback from a small group of customers. Since responses are evaluated one by one, surveyors can ask highly detailed questions and probe deeper based on specific responses.

Purchase analysis: Good for measuring purchase activity from a large number of customers who buy regularly.

If you’re conducting a survey, carefully structure your survey questions, the length of the survey and the delivery mechanism.  Obtain feedback to make sure that each question is neutral, specific and focused on a single topic, and that it will provide the information you seek. Evaluate the different survey delivery methods, i.e., email, direct mail, telephone or a combination of these. Each method has pros and cons, so choose the method that will garner the most truthful information and the highest response rates.

Be careful not to make the survey too detailed. Your customers are busy, and may not have time to answer 25 questions. Shoot for five to seven key questions. If you need more, consider providing an incentive to customers who complete the survey.

If you’re analyzing purchase data, one way to start is to create an RFM model. RFM measures the Recency and Frequency of customer purchases and the total Money spent by each customer. The rule of thumb is that the higher a customer ranks in each of these categories, the happier they are. While that’s not always the case, it can be a useful guideline.

Analyze Your Customer Data

After you’ve collected and organized your data, analyze it and measure your findings. Some questions to consider:

• What is your response rate? Is it large enough to create an accurate sample?
• What did you learn from the survey?
• What actions do the results seem to suggest? 

If your data doesn’t present a clear picture, gather more information before jumping to conclusions. It’s better to measure twice and cut once.

If you’d like to quantify the dollars lost from a low customer loyalty number, check out Ken Blanchard’s Cost of Doing Nothing Calculator.