Basics of Loyalty Economics

 

With the increasing number of competitors in every Business, it has become more important to retain existing customers. With a plethora of options available, customers tend to deflect between Businesses. Understanding this customer behaviour with a goal to trigger loyalty, has led to the evolution of ‘Loyalty Economics’.

Business owners realise the importance of returning customers. These customers will visit your Business more often, spend more money than the first time customer, understand your value proposition and will most likely recommend your business to others. On an average 80% of the Revenues of most businesses come from 20% of Loyal customers.

To fully understand the concept of loyalty economics it is important to understand the different types of customers. These customers can be classified by their frequency of visit and level of loyalty indicated in the LoyLap Loyalty Steps below.

 

LoyLap Loyalty Steps

Identifying your customers based on level of loyalty and frequency of visit

 

Once you have separated your customers into the above types you can calculate the Life Time Value (LTV) of each type.

LTV = (Average Monthly Revenue per Customer) * (Gross Margin Per Customer) / Churn Rate.

Considering the example of Loyal customers, they spend more per month and come to your Business repeatedly (Thus having lower churn rate). Looking at the LTV formula, it becomes obvious that returning customers who spend more are more profitable.

What’s important to note is that, as a Business, you will most likely spend the same amount of time serving Loyal – Visits Frequently or Indifferent Visits Occasionally, type of customer. However the Lifetime value of loyal frequent is clearly higher. Hence it is vital for Business to find ways to move their customers up the steps to Loyal Frequent.

With these aspects of Loyalty Economics in mind, the benefits of having a Loyalty Programme becomes more apparent. Loyal Frequent customers tend to be attracted to the following aspects of a Business:

  1. Reason to be loyal (A great product/service is a great start!)
  2. Convenience (Customers remain loyal when your Product/Service helps address a need)
  3. Acknowledgement (Customers like to be appreciated. Could be a simple thank you or a gift/loyalty card)
  4. Rewarding Loyalty (Taking acknowledgement to the next level by rewarding Customers in some form)
  5. Engagement (Both online and offline communication to get your Customers walking through your door again)

 

LoyLap’s Resource Center will help you refine these aspects. When used together with a successful Loyalty Programme, you will have more frequent loyal customers with greater average customer lifetime value.

 

Next Topic: Loyalty Loop

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