2.

The Math Behind
Customer Loyalty

The Math Behind Customer Loyalty

D espite the fact that, in an ideal world, loyalty would just come over time of using your product, there’s a lot of work and effort that goes into getting and maintaining a loyal customer base. While it is expensive and timely, it may surprise you to know that it still costs less money to generate loyalty and excitement around your brand than to try to gain new customers. Here are a few business metrics to give some insight into why loyalty (and maintaining loyalty), over trying to generate new users can be a better tactic both for your business and for your customers.

Cheaper to retain than acquire

It is cheaper to retain your existing customers than acquire them. Every time you acquire a new customer, you have a variety of one-time costs associated with getting them onboarded. All marketing costs including advertising and content is usually included in the cost of acquiring a customer, a standard business metric also referred to as CAC. When calculating CAC your finance team will also include any sales legwork involved in signing them up, the time spent by your customer success managers for training, and then whatever the cost of support is for them in the first few months of learning your product. There are a lot of resources that go into getting a customer up and running, and certainly, some continue on as your company tries to retain the customer. But the number of resources you spend on retaining an existing customer is far less than what you spend getting one up and running.

On average, it costs 6 to 7 times more to acquire a new customer than keep an old one. Investing in customer loyalty benefits your company’s bottom line with much more leverage than investing in acquiring more customers.

Lifetime value of loyal customers is much higher

When someone becomes loyal to your brand, they are much more inclined to deeply integrate their life with your product. Consider a loyal Apple fan. Their computer, watch and home technology is all powered by Apple, and it all works together in harmony. They can’t easily replace one of those products without losing a ton of value. Building this kind of loyalty with your customers means that everything that you offer to them is more “sticky”, or harder to get rid of. With that kind of stickiness, the lifetime value of your loyal customers is going to be much higher than that of your customers that are fresh to your product or have the potential to churn.

Similarly, if you are always acquiring new customers, and if a customer only purchases from you once, your return on ad spend (ROAS) doesn’t increase over time. Big Commerce provides a sample calculation on ROAS to demonstrate how this works: “Consider a company that spends $2,000 on an online advertising campaign in a single month. In this month, the campaign results in revenue of $10,000. Therefore, the ROAS is a ratio of 5 to 1 (or 500%) as $10,000 divided by $2,000 = $5.”

Revenue: $10,000
Cost: $2000
ROAS = $5 OR 5:1

For every dollar that the company spends on its advertising campaign, it generates $5 worth of revenue. Combining this kind of insight with the lifetime value of a customer, especially one that is loyal and you do not have to re-advertise to, can be really insightful when determining where you need to go with your business.

Happy customers refer their friends

Happy customers will talk about their amazing experiences with your product, support team, and your brand as a whole to all of their friends. In Net Promoter Score lingo, this is called a promoter. The three scales for customers in NPS (Net Promoter Score), ranked out of 10, based on a survey they are sent:

  • Promoters (score 9-10) are loyal enthusiasts who will keep buying and refer others, fueling growth.
  • Passives (score 7-8) are satisfied but unenthusiastic customers who are vulnerable to competitive offerings.
  • Detractors (score 0-6) are unhappy customers who can damage your brand and impede growth through negative word-of-mouth.

Forbes notes that Promoters outspend all other customers by 17% each month. Further, if you offer anything like a bonus for referrals, and it’s a good program (which we’ll talk about later) they will be even more inclined to share information about everything awesome that you’ve provided for them over their time as a customer. Allow some of that goodwill that you’ve generated with them to come back to you as new customers through referrals.

According to Accenture, 55% of loyal customers recommend your business to family and friends, and 12% will publicly defend your company on social media—that’s pretty powerful. The revenue that could deliver, especially if their friends that they are referring fit the same customer profile as your happy customer, is astounding.

Promoters spend much more than detractors

MyFeelBack writes that a loyal customer not only spends, on average, 67% more than a first-time customer but is also 71% more likely to promote a company, recommending it to others. So, when a customer is a promoter of your brand, not only are they likely to spend significantly more on your product and the extraneous add-ons to your product than people who are neutral or detractors, but they also are much more likely to talk about you and tell other people about it.

The cumulative effect of customer loyalty on your company’s bottom line is enormous. Promoters spend more, are cheaper to retain, tell their friends and generate revenue and even make your product better in the long run through providing feedback and insight.

Negative churn

Negative churn is the ultimate dream for many SaaS companies. To get into a bit more explicit: it’s when additions/extensions/additional sales/tariff increase for your existing customers exceeds the revenue that you lose because of the churn. As a phenomenon, it can be seen in SaaS or any other business with constant purchases. So, if you have loyal customers who are constantly buying up your stuff and your product, you’re more likely to push into negative churn.

The three ways to move towards negative churn and capitalize on the loyalty that you have built with your customers are:

  • Expansion revenue: expansion revenue works well with loyal customers because they’ve already so deeply embedded your product into theirs. So, when you ask if they want more seats or want to move up a level for more advanced features, they trust that you’re offering them something valuable. This is likely easiest for products with subscriptions that are recurring or SaaS products. Netflix did something like this when they raised their subscription prices by a single dollar and drove revenue growth up 35%, 25% higher than growth from new subscribers.
  • Upsell revenue: this usually falls to your customer success team or sales team. Much like what employees at the Apple Store do, an upsell can occur if your employee has taken the initiative to get to know a bit more about the customer, and can speak to the higher-value options of your product compellingly. A customer loves to feel listened to, so if your employee can successfully relate their needs to a product offering, you’ll be building loyalty as you push towards negative churn.
  • Cross-sell revenue: The last strategy for negative revenue churn is based on product cross-sell. If your company has a big portfolio of solutions to offer customers, there is a big opportunity to layer in cross-sell revenue into your mix. This is especially true if you already have customer loyalty. Offering a customer an additional product from a company that they already trust and love is much easier than offering them something they’ve never heard of. According to ForEntrepreneurs, 70-95% of revenue comes from upsells and renewals whereas only 5-30% come from the initial sale.