The economic benefit of customer loyalty is measured by lifetime value (LTV), which is the net present economic contribution of a customer over the number of years they are with you. For example, Cadillac learned that the LTV of an owner was over $1 million—that’s the value of cars purchased, service, parts and referrals. Not bad.
I believe there are four types of customer/member loyalty:
- Situational: I’m loyal to your organization when the conditions are right. For example, I’m loyal to an airline when there isn’t a better option or they have a monopoly in a given market.
- Promiscuous: I’m loyal until a more attractive offer comes along. I’m loyal to one brand, but I’ll switch to another if they have a promotion or offer a better alternative.
- Purchased: If you give me points, rewards or a financial incentive to be loyal, I’ll stay with you. This is essentially a bribe. I’ll fly on your airline not because I love your service, but in spite of it—because you give me free tickets.
- Earned: This is the best, most enduring and hardest to achieve. I’m loyal to you and your organization because we share the same values. You get me, and I feel better working with you or buying from you. I’m willing to pay a premium in exchange for the value I derive from your association.
So, the questions are: what kind of loyalty does your organization engender, how do you know and how do you build earned loyalty?
Three leading indicators:
- How loyal are my employees? This is the best indicator of authentic customer or member loyalty.
- Do we measure and know the LTV of our members? You can’t appropriately invest if you can’t calculate what their ROI will be over time.
- Is there anyone responsible for loyalty? Saying we are all responsible isn’t the right answer. Yes, it’s everyone’s job, but it needs an owner.
For deeper insight, check out this classic book, The Loyalty Effect, that is still relevant and makes the case of why loyalty is essential and how to build it.
Your organization will be more profitable, more effective and more fun to work for if you attract and retain the best, most loyal members and keep them happy.