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Aug 28, 2020

Customer Loyalty and Customer Retention: Which Is Better?

Let’s talk about how to define both customer loyalty and customer retention and how to measure these important aspects of the customer relationship

By Dorea Novaez, Contributor @ Endear

At a high level, the terms customer loyalty and customer retention may seem interchangeable. But they aren’t exactly. 

They are complementary, but there is a nuanced difference we think is important to discuss as you think about your broader strategic goals for both.

Customer Loyalty vs. Customer Retention

First, let’s start by defining our terms. 

Customer loyalty is when customers continue to buy from you and are enthusiastic about your brand, to the point that they don’t want to switch to a competitor, and they actively encourage others to purchase your brand. This can also be called brand loyalty.

Customer retention is when customers have an established relationship with your brand — they have made at least one purchase, may continue to purchase from you on a regular basis, and have not switched to a competitor yet.

Yes, these two terms are intertwined. A loyal customer is a retained customer, but a retained customer may or may not be a loyal customer. And, in the real world, we know customers shop around, moving back and forth between brands — making the distinction between these two terms even murkier. 

In the end, remember to focus on the sentiment of your customer base. Loyal customers trust you and want to help your brand to grow, where retained customers are currently ambivalent and uncommitted.

How to Measure Customer Loyalty

Now that we have defined customer loyalty and retention for our discussion, let’s talk about how you can measure it for your business. Loyal customers are often those with the highest satisfaction, and they are willing to voice that customer satisfaction through word-of-mouth, testimonials, and reviews. You can get a barometer on this through various types of customer experience and satisfaction surveys, such as Net Promoter Score® (NPS). You may also track the interactions you are having with customers on social media.

Beyond these more qualitative approaches, you will also want to look at key metrics such as average order value (AOV) and purchase frequency — aiming for an increasing trend over time.

AOV = (TR/TO) x 100, where:

  • TR = total revenue earned during the time period
  • TO = total orders placed during the time period

Purchase Frequency = (RO/UC) x 100, where:

  • RO = number of repeat purchases placed during the time period
  • UC = number of unique customers during the time period

Loyal customers are more likely to spend more per trip and shop with you more frequently than those who are still uncertain about your brand. So, by evaluating these metrics, you can easily segment your customer database and provide a tailored marketing strategy for each.

How to Measure Customer Retention

Measuring customer retention can be a bit more complicated, as you have more blind spots. You can’t always know the other places customers may be shopping, and they may not be as vocal about their sentiments towards your brand. But there are ways for you to set important benchmarks and continue to evaluate your customer loyalty and retention strategies.

First and foremost is your customer retention rate or CRR. This is a measure of what percentage of existing customers remain with you over a specific period of time. The higher the number, the better your retention.

CRR = [(CE - CA)/CB] x 100, where:

  • CE = number of customers at the end of the time period
  • CA = number of customers acquired during the time period
  • CB = number of customers at the beginning of the time period

Secondly, you will want to monitor your repeat customer rate to measure the percentage of customers that purchase from you more than ones over a certain period of time.

Repeat Customer Rate = (RC/UC) x 100, where:

  • RC = number of repeat customers during the time period
  • UC = number of unique customers during the time period

With a baseline for these metrics you can then try new marketing techniques and customer engagement strategies to see if you can increase customer retention over time and determine whether or not you are getting traction with certain promotions or initiatives.

Which is Better: Customer Retention or Customer Loyalty?

So, which is more important between customer loyalty and customer retention? The answer is that both are important. Of course, loyal customers are the gold standard, and we all wish we could focus our energy on getting more customers to sing our praises from the rooftops. But the bottom line is you have to retain customers first. Which means having an actionable plan to convert those new customers into returning customers and, eventually, truly loyal customers. Plus, of course, a set of key metrics to measure your results.

For more information about customer loyalty and retention strategies and best in class customer loyalty and rewards programs, check out our dedicated blog posts and read more about how Endear can support your business with a unified CRM designed for modern retail.