Introduction

Sustainable growth is impossible if a business focuses solely on gaining new customers. Keeping them returning for more is just as important, hence the introduction of numerous key metrics for customer retention and loyalty.

As both terms are closely interconnected, most beginners understandably view them as synonymous. However, at a closer look, there are several differences; our team will discuss them in more detail. 

What Are The Differences Between Customer Retention and Loyalty?

Unlike customer retention, customer loyalty goes beyond repeat purchases (Image source: Wikimedia). 

Customer Retention

Customer retention refers to a business's practices and strategies to keep existing customers and prevent them from switching to competitors. Its main goal is to encourage continued purchases and engagement with the brand.

Focus:

  • Addressing customers’ immediate needs and concerns
  • Offering incentives like discounts, loyalty programs, or improved customer service to keep them satisfied and prevent churn

Metrics:

  • Churn rate (percentage of customers lost in a period)
  • Repeat purchase rate
  • Customer lifetime value (total revenue generated by a customer throughout their relationship)

Customer Loyalty

Meanwhile, the concept of customer loyalty goes beyond simply keeping customers; it paves the way for their emotional attachment and a deep commitment to the brand. 

Long story short, loyal customers are not just likely to keep buying. They advocate for the brand and promote it to others as well.

Focus: 

  • Building loyalty/trust and emotional connections
  • Delivering exceptional experiences
  • Exceeding expectations
  • Fostering a sense of community with the brand

Metrics: 

Loyalty can be directly measured through surveys and satisfaction scores. However, it's often reflected in indirect metrics like:

  • Net promoter score (NPS)
  • Social media engagement
  • Customer lifetime value (which tends to be higher for loyal customers)

Key Differences

Motivation: 

Retention focuses on short-term benefits and preventing churn. On the other hand, customer loyalty aims for long-term commitment.

Strategies: 

From our observation, retention strategies are mostly transactional (discounts, rewards, etc.).  In contrast, loyalty strategies focus on building relationships through personalized experiences and community building.

Outcomes: 

The distinctions in their motivation and strategies clearly lead to different outcomes: retention ensures continued business, while loyalty fosters brand advocacy to increase customer lifetime value.

How To Measure Customer Retention and Loyalty

There are some common metrics to measure them (Image source: Pxhere). 

Customer Retention

a. Churn Rate

Also known as customer churn or customer attrition, churn rate signifies the percentage of customers who stop doing business with you within a specific period.

How do we calculate it? There are two common ways, depending on your chosen timeframe:

Cohort Churn Rate:

Formula: Churn Rate (%) = [(Number of churned customers) / (Original group size)] * 100%

  • Select a specific group of customers (e.g., all customers acquired in May 2024).
  • Track how many people from that group are no longer customers at the end of the desired period (e.g., October 2024).
  • Divide the number of churned customers by the original group size and multiply by 100%.

Suppose you run an online fitness app; 200 customers signed up in May 2024, and in October 2024 (5 months later), 30 customers canceled their subscriptions or are no longer active. In that case, the churn rate should be: [(30 customers) / (200 customers)] * 100% = 15%. 

Subscription Churn Rate (for Subscription Businesses):

Formula: Churn Rate (%) = [(Lost recurring revenue) / (Beginning recurring revenue)] * 100%

  • Calculate the total recurring revenue lost from canceled subscriptions within the defined period.
  • Divide this lost revenue by the total recurring revenue at the beginning of the period and multiply by 100%.

Let’s say you owned a music streaming service with a monthly subscription fee of $10. The beginning recurring revenue (August 2024) was $20,000 from 2000 subscribers, but then you lost $1,500 of recurring revenue from canceled subscriptions in September 2024. 

The churn rate: 

[($1,500) / ($20,000)] * 100% = 7.5%

b. Repeat Purchase Rate (RPR)

This metric reflects the percentage of your customers returning to make another purchase from you after their initial buy. Like with customer churn rate, you can choose either of the two common options based on chosen timeframes: 

Simple Repeat Purchase Rate:

Formula: RPR (%) = [(Number of repeat customers) / (Total number of customers)] * 100%

  • Identify the total number of customers who made a purchase within a specific period (e.g., one year).
  • Count the number of customers who made more than one purchase within that period.
  • Divide the number of repeat customers by the total number of customers and multiply by 100%.

Customer-Level Repeat Purchase Rate:

  • Calculate the RPR for each individual customer, considering the number of times they've purchased within the chosen timeframe.
  • Then, average the individual RPRs to get an overall RPR for your customer base.

Example:

You own an online clothing store and want to analyze customer retention for the past year (January 2023 to December 2023) using the following data:

  • Total number of customers who made a purchase in 2023: 1000
  • Number of customers who made only one purchase: 700
  • Number of customers who made two or more purchases: 300

Then, the simple repeat purchase rate would be: [(300 customers) / (1000 customers)] * 100% = 30%. This means in 2023, 30% of your customers made repeat purchases. 

How about the customer-level repeat purchase rate? Let's say you have data on the number of purchases made by each customer:

  • Customer A: 2 purchases
  • Customer B: 1 purchase
  • Customer C: 3 purchases

The individual RPR for each customer:

  • Customer A RPR = (2 purchases / 1 purchase) = 200%
  • Customer B RPR = (1 purchase / 1 purchase) = 100%
  • Customer C RPR = (3 purchases / 1 purchase) = 300%

Average the individual RPRs, and you have: 

(200% + 100% + 300%) / 3 = 200%

This calculation provides a more inclusive view. While the overall RPR is 30%, Customer A and C are highly engaged with repeat purchases, while Customer B has not returned.

Customer Loyalty

a. Net Promoter Score (NPS)

The NPS is a commonly used metric to gauge customer loyalty based on a single question: "On a scale of 0 to 10, how likely are you to recommend our product/company to a friend or colleague?" Customers' responses are classified into 3 groups:

  • Promoters - who score 9 to 10: Loyal and enthusiastic customers that will likely recommend your brand.
  • Passives - who score 7 to 8: Neutral or satisfied customers who might not be actively promoting your brand.
  • Detractors - who score 0 to 6: Unhappy customers who are unlikely to recommend your brand and might even spread negative word-of-mouth.

Once the responses are classified, determine the NPS following these steps: 

  • Calculate the percentage of Promoters and Detractors.
  • Calculate the NPS score using the formula: Promoters (%) - Detractors (%)
  • The resulting score ranges from -100 (all Detractors) to +100 (all Promoters).

Below is a breakdown of the score interpretation: 

  • Below 30: Poor
  • 31-50: Average
  • 51-70: Good
  • 71-100: Excellent

Example: 

Imagine you send an NPS survey to 100 customers and receive the following responses:

  • Promoters: 40 customers
  • Passives: 30 customers
  • Detractors: 30 customers

The NPS = 40% (Promoters) - 30% (Detractors) = 10% (poor)

b. Customer Lifetime Value (CLTV)

CLTV goes beyond simply measuring current revenue from a customer. It represents the total profit you expect to generate from their entire relationship with your brand - and, thus, is considered a crucial metric for understanding customer loyalty.

Formula: Average CLTV = (Average Customer Value * Average Customer Lifespan) / Customer Acquisition Cost

Imagine you run a subscription-based music streaming service with the following data:

  • Average purchase value (monthly subscription fee): $10
  • Average purchase frequency (subscriptions renewed per year): 10 (customers renew once every 12 months)
  • Average customer lifespan (customer retention time): 2 years
  • Customer acquisition cost: $50

Calculation:

  • Average Customer Value: $10/month * 10 subscriptions/year = $100/year
  • Average CLTV: ($100/year * 2 years) / $50 = $4/year

In this example, your average customer generates $4 in profit over a 2-year period.

Why Are Both Customer Retention and Loyalty Important?

Effective customer retention builds loyalty.(Image source: Pexels). 

Increased Revenue

Loyal customers (customer loyalty) who trust your brand are more likely to make repeat purchases and spend more overall (customer retention) and vice versa. 

This consistent revenue stream contributes directly to your bottom line. Plus, these customers are also more receptive to offers for similar products or services, creating even better opportunities for revenue increase.

Lower Marketing Costs

Existing customers are already familiar with your brand and offerings, which makes them more likely to convert on marketing campaigns and, as a result, contributes to higher ROI.

Better yet, once they become loyal advocates, these customers will voluntarily promote your products/ services to their network through positive reviews and recommendations. Thanks to this organic marketing approach, your business can stay less dependent on paid advertising and associated costs.

Improved Brand Reputation

Needless to say, existing customers with positive experiences tend to leave very favorable reviews and testimonials, which boost your brand reputation and attract new prospects. 

Furthermore, since loyal customers have great confidence in the brand’s capability, they are willing to offer constructive feedback whenever there is any customer issue. Your business can address those problems before they worsen on a larger scale, minimizing complaints and protecting the brand’s image as a result.

Better Sales Forecasting

With a better understanding of the customer retention rate and CLTV, you can forecast future revenue more accurately to make better decisions regarding staffing, budgeting, inventory management, and more.

How To Retain Customers

Remember to always keep in touch with customers (Image source: Picpedia). 

Train Your Employees

Make sure your employees have a thorough, in-depth understanding of the products and services. 

That way, they will be empowered to answer customer questions confidently with appropriate and informed recommendations. Also, proper training in essential soft skills and active listening/empathy is a must.

Keep In Touch With Customers

Your agents/employees must be able to address potential issues before they arise by constantly analyzing customer behavior. 

Virtual contact centers like StringeeX are highly recommended here, as they allow you to monitor and keep in touch with customers across all communication channels (Facebook, Instagram, email, etc.) via one single interface. 

As customer data is now stored in one place and no longer dispersed, you can gain a more inclusive overview of their preferences and buying patterns. From there, it would be easier to adjust, update, or even terminate a marketing strategy accordingly to suit customers’ needs. 

Conclusion

Although there are clear distinctions between customer retention and loyalty, treating them as two separate concepts is not a wise move. When executing a strategy/plan, a business must keep them both in mind to guarantee the best outcomes.

As always, write to us if you have any suggestions or questions.