What is customer loyalty? The CX Network Guide

We explain the definition of customer loyalty, the figures that show why it is important and how brands can retain loyal customers

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By: CX Network, Jerome Smail 01/31/2023

In this definitive guide to customer loyalty we explore everything you need to know about gaining and retaining customers, including how to form emotional connections to key stats and the role of customer data.

What is customer loyalty?

Customer loyalty refers to a customer's willingness to repeatedly engage with and make purchases from a particular company over time. It is not to be confused with repeat customers, who will do business with a company multiple times – it is when people are willing to turn down a better product or a better price to continue doing business with you.

André Grandt, CX and digital transformation lead for Saudi Arabia and the Gulf, Roche, explains this further: “There is a big difference between a repeat customer and a loyal customer. A loyal customer will have an emotional connection to the company or brand.”

There is more on why it's important for you to create emotional connections between customers and your brand in this guide, but first, let’s take a deeper look at why loyalty is so important.

Why customer loyalty is important

Many studies point to the fact that it is more expensive to acquire new customers than to retain them, by as much as five or six times the cost.

Bain & Company profiled one retailer and found the average online apparel shopper is not profitable until they have shopped on the brand’s website four times – meaning this particular business had to retain the customer for 12 months just to break even on their acquisition cost.

“Across a wide range of businesses, customers generate increasing profits each year they stay with a company,” says Fred Reichheld of Bain & Company. Reichheld adds that a five percent increase in customer retention can produce more than a 25 percent increase in profit.

CX Network’s Global State of CX 2023 survey found that 75 percent of all respondents either agree or strongly agree that customers are more willing to switch brands if they are unsatisfied, demonstrating the importance of investing in this area.

The two types of customer loyalty

Generally speaking, there are two types of customer loyalty:

Earned loyalty describes the scenario where the customer returns because of high levels of satisfaction with the product, service, the brand’s values and overall customer experience.
Bought loyalty is derived from rewarding a customer’s repeat business through discounts and targeted loyalty promotions.

By learning more about your customers to find out what drives their transactional habits, you can gauge which of these two categories customers fit into.

In terms of strategy, however, it is not a case of aiming for one over the other. Bought loyalty gets a bad rap for its lack of sustainability within a wider business, however, your efforts to improve customer loyalty should still aim to capture both types.

Earned and bought loyalty distinguish whether a customer is loyal because of rewards or satisfaction. An emotional connection with customers however, can bridge the gap between these two types.

Forming emotional connections with your customers

Traditionally, loyalty programs have been entirely transactional, with customers being directly awarded points or other rewards based on how much they spend. Now however, Deloitte reports that as many as 54 percent of loyalty programs are offering non-transactional rewards.

This approach is designed to drive not just rational customer loyalty, which stems from a customer saving time or money with a brand, but also emotional loyalty.

Emotional loyalty comes when a brand can demonstrate to a customer that it truly cares and is willing to make financial concessions to improve the customer experience. It can be much more elusive than rational loyalty, which can be relatively easy to attain by demonstrating some reasonable cost or time benefits to the customer.

By offering customers rewards that do not require a monetary investment from them, brands have a relatively easy option for winning emotional loyalty.

The importance of customer communications

Earned loyalty can come from a holistic approach to improving the customer experience but research can help to tailor and target your efforts.

Marketing academics Andreas B. Eisingerich, Deborah J. MacInnis and Martin Fleischmann extol the benefits of ‘brand admiration’, which can be achieved via ‘the three E’s: providing value to customers by enabling, enticing and enriching customers.

Key aspects of this are building the ability to solve customers’ problems, helping them to feel good about their choices and establishing warm and authentic connections.

Customer service expert Shep Hyken, meanwhile, believes that effective communication is vital. “Whether you’re sending out emails, text messages, calling the customer, or using any other form of communication, keeping customers informed is actually creating confidence that all is going according to plan,” he says.

An example of good communication with customers comes from telecoms software provider Wavelow – the company builds trust by journey mapping the customer experience via a three-step plan:

Creating confidence by connecting with customers on their level
Staying committed by proactively messaging customers on open tickets
Investing in customer success by having someone solely focused on a customer’s experience

How to retain customers

The benefits are clear – so how can you improve loyalty and retain customers?

1. Collect and use customer data

A foundational step on the path to fostering and nurturing customer loyalty is learning more about your customers to find out what drives their transactional habits.

As with many aspects of CX, data plays an essential role here. Customer data can be sourced passively from every interaction a customer has with a business. This work has now been enhanced with the emergence of generative artificial intelligence (AI) tools that can be deployed across the contact center.

Active methods of gathering customer data include voice of the customer (VOC) programs, which often comprise surveys and focus groups.

It is imperative however, that regulation on data collection and privacy is adhered to at all times. With this in mind, a thorough knowledge of state-by-state US law, UK and European GDPR rules, as well as any other relevant legislation, is of the utmost importance.

87 percent of customers are happy to have their activity and behavior tracked in order to receive personalized rewards

“In the world of big data, it is important to identify the right links and create interfaces in order to make the best possible use of [customer] data,” says Indrajit Rana, head of sales excellence and customer intelligence at TRUMPF, a winner at the CX Elite Awards 2022.

While many consumers express concerns with regard to the privacy and security of their personal and customer data, the truth is that 87 percent of customers are happy to have various details of their activity and behavior monitored and tracked in order to receive access to personalized rewards or engagements.

Personalized experiences can be further driven through the use of VOC insights and automated CX solutions that make use of customer data. In the UK, this approach helped HSBC to attain an improved level of agility in its operations due to the implementation of intelligent chatbots that can offer personalized recommendations and solutions to its customers.

2. Give rewards with customer loyalty programs

As described above, bought loyalty is usually sought through enticing customers to sign up to loyalty programs.

A highly successful example is the Boots Advantage Card – one of the most popular and generous loyalty schemes in the UK, with 15 million active users, grown over the years from 52,000 who signed up when the card was launched in 1997.

With competition for this model now tight, many brands have discovered new and inventive ways for building out a loyalty program, for example by enlisting partners to enhance offers and rewards. Some other examples include:

Diners Club International is a payment method that taps the customer desire for exclusivity and status while connecting organizations with high-worth customers. DCI offers its Clubmembers perks for top restaurants, attractions, shops, airport lounges and other exclusive venues around the world, as well as car rental offers, shopping privileges and travel inspiration. Furthermore, Clubmember perks are tailored to local markets, providing a truly “glocal” experience for global citizens. As a result of its approach to spending and brand affinity, DCI today has a customer base of adventure seeking, high-spending individuals that it understands inside out.

Others infuse elements of gamification or exclusivity.

MyMcDonald’s Rewards is the franchise F&B brand’s big step into the world of loyalty but there are no cards in sight.

While loyalty was previously based on Happy Meal toys, brand affinity and, later, the McCafé Stamps rewards program, today is it in the diner’s pocket and available to redeem at kiosks, restaurants and drive throughs. Points are awarded to an app-based account for transaction, with a bonus 1,500 points awarded on sign-up and additional points offered on selected menu items. It also supports charities, including Ronald McDonald House Charities, BBC Children in Need and FareShare.

Booking.com is a master of using the tiered reward system to boost engagement and sales, offering customers three “genius” levels. After all, customers desire the promise of exclusivity from the companies they buy from and, in the highly fragmented global online travel agent market, every sale counts.

Level one Genius rewards are applied for each new customer and give travelers a 10 percent discount at participating properties worldwide. Level two increases this to a maximum of 15 percent and adds free breakfast and upgrades, while level three offers discounts of up to 20 percent, along with free breakfast options, room upgrades and priority support.

3. Measure customer loyalty

According to research, the average consumer belongs to more than 14 loyalty schemes. With such competition, it’s important to gain an understanding of the effectiveness of your efforts and to measure customer loyalty as accurately as possible.

Customer retention rate is the number of customers who repeatedly buy from an organization or brand over a set period. At the other end of the scale, churn rate measures the percentage of customers lost during a specific window.

Dr. Phil Klaus, a professor of customer experience and marketing strategy, advises that a loyalty program does not necessarily lead to loyal customers: exploring ‘true’ loyalty requires benchmarking yourself against your competitors by measuring share-of-category.

Continuous measurement of earned and bought methods can produce an ever-clearer picture and help to ensure your efforts in improving customer loyalty bear fruit.

How artificial intelligence (AI) is changing customer behavior

AI is changing the way businesses operate, and brands must take into account how this is impacting on their customers’ behavior.

Devon Mychal, senior director of product marketing for Talkdesk, told us how AI can provide insights that are useful for both the customer and the business. “If a customer searches an ecommerce store for outdoor equipment that would be needed on a cold weather trip, there could be flags in this interaction that show the customer is about to take this trip.

“An AI can analyze this data and produce insights that give the company several options: point the customer towards more equipment that could be useful, reach out about previous purchases and offer a free upgrade, or direct message relevant content that offers tips for a safe trip, without expecting a sale conversion.”

These suggestions, Mychal says, demonstrate to the customer that the business cares about them.

Adding AI to trigger additional touchpoints and provide new services can build the emotional connections that are so vital to foster brand loyalty.

The influential CX keynote speaker and author Dan Gingiss agrees that brands must buy in to the new technology. “What I suggest to brands is that you play around with it, that you learn what it can do, that you do not immediately lean in and say, ‘ok, this is going to solve every one of my problems’. Or to believe that you never have to blog again, you can just have ChatGPT do it. I do not think that is the right answer.

“I do, however, think that ChatGPT can do a great job of building a template for a blog or building an outline for a blog in which you then fill in some of the details. What I have found is that on a lot of topics it is very good at scratching the surface on the topic, but it is less good as you want to get into the real nitty gritty details. Again, I think it will get better at that over time.”

Along with providing the customer data analysis mentioned above, ChatGPT is already being deployed in a number of other creative ways. These include Duolingo’s feature that helps users learn a new language by explaining grammatical rules and giving feedback when the user makes a mistake, and Be My Eyes’ function helping visually impaired users see what is around them thanks to an image-to-text generator which allows users to take pictures and send them to its AI-powered virtual volunteer.

These examples show that companies that add AI to trigger additional touchpoints and provide new services can build the emotional connections that are so vital to foster brand loyalty.

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Topics: Customer Experience Customer Loyalty Customer Data, Insights & Analytics