The formula for calculating loyal customer value
Upnify Editorial Team - 7 de agosto, 2023
Working to build customer loyalty... will it pay off? There is much work to be done to create a service culture that will generate loyal customers. For this reason, I recommend that the manager who takes the reins of his organization and sets it in motion with this goal should first sit down and calculate. Here is the formula.
What is a loyal customer?
Before calculating what a loyal customer will bring to the company, we must be clear about what we call a loyal customer.
A "loyal customer" is one who intends to buy from you whenever they have a need that you can meet with your services. If the customer does not consider other options and chooses straight to your company, he is your loyal customer. But they do not necessarily have a high purchase frequency. It may be a customer who buys twice a year but hesitates to buy from you. That is a loyal customer.
Therefore, a loyal customer does not necessarily mean a customer who buys frequently. If you want to calculate the return of your loyal customers, you must estimate the frequency with which the need you supply occurs in the average of your customers.
Fortunately, recurring purchases are not the only effect we observe on loyal customers. Their greatest potential lies in the recommendations they make about your brand to their circles of influence. This impact is growing due to new social tools. With a single click it is possible to tell hundreds or thousands of contacts that you have been satisfied with a certain commercial experience.
A 2013 study by Echo Consulting reveals that customers who have a positive service experience tell 15 others about it. Those people, when they need your service, will inevitably remember their friend's recommendation and, you know what? This well-intentioned comment will influence their decision more than good advertising.
A third effect we observe with loyal customers is that exit barriers to other options or providers are raised. This means that your loyal customer is so happy with what you offer that they don't even want to consider other alternatives. This makes them happy to pay you more because they value the differential service you offer as a plus.
This naturally translates into differentiated prices and/or the possibility of increasing each sale by adding complementary services or products. This naturally translates into higher sales volumes.
How do you translate customer loyalty into economic return?
We will account for the effects mentioned above so that you have a calculation basis that allows you to value your loyal customers.
Data you will need:
- Average amount per sale (S)
- The average number of purchases by a loyal customer - per year (P)
- Additional customers through word-of-mouth influence (A)
- Price differential for higher service (D)
*(A) is expressed as the number of additional customers that a loyal customer can attract. Of those 15 people you influence by your recommendations, how many will become customers? A very conservative estimate is to assume that only 1 of those 15 people will become an actual customer.
Let's get to math:
- S*P= total annual sales to a loyal customer
- S*P*A= Annual sales to additional customers attracted by loyal customers.
- Integrating the 3 factors, we get: :(S*P) *D= Increased sales due to superior service.
- The annual return of a loyal customer= S*P*(1 + A) x (1 + D)
Example for car after-sales service:
- S = USD 300
- P = 6
- A = 1
- D = 15%
Annual return of a loyal customer = USD 300 x 6 x 2 x 1,15 = USD 4140!!!
And that's just for ONE loyal customer.
It's your turn, do the math... you'll be surprised. The key is to achieve that emotional impact on your customers. For that you must work inwards, with your people, activating their service vocation. You must develop a renewed and ever-growing service culture, coupled with work systems that make it consistent and unstoppable. Are you ready?
Upnify´s Editorial Team; formed by professionals and experts in Marketing, Sales, Communication, Design and other areas. They share their experience through articles enriching the commercial culture.