Unit 2

Customer Loyalty, Involvement & Lifetime Value

Customer Loyalty, Measuring Customer Loyalty, customer

Categorization, Loyalty Schemes: Getting close to
customers by different means, Customer Segmentation
customer Value, Customer Value Co Creation, Customer
lifetime Value
 Customer Loyalty
■ According to a Benchmark Report back in 2018, 44% of
businesses didn’t know their rate of retention or churn.
■ In fact, 32% of B2B executives were completely unaware of
their loyalty rates at all.
■ According to most recent research, 86% of B2B brands aren’t
measuring the ROI of their customer experience, while 47%
don’t measure upsells, cross-sales, or other metrics of
customer loyalty.
■ Real business growth starts with measurement.
■ The trouble is that many of the executives didn’t know how to
measure customer loyalty.
 Customer Loyalty
■ To get a real understanding of your customer loyalty, it’s not
enough to look at your loyal customer rate (LCR) or a customer
retention rate (CRR).
■ Instead, you need to understand why customers are loyal and
how much they’re worth to you.
■ It will take time and effort to grow your relationship with your
customers and earn their trust.
■ Exceptional end-to-end customer experiences are the best way
to earn customer trust.
■ Provide great service and make customers' lives easier, and
they'll likely turn into advocates for your brand.
 Why measure Customer Loyalty
■ You’ll put customer loyalty at the service of your business goals
– By measuring customer loyalty, you can use the data as a
benchmark for growth.
– Without it, you won’t understand the progress you’ve made.
■ Use the voice of the customer (VOC) to improve your loyalty
– By linking up retention rates with deeper insights (into the
drivers behind customer loyalty, for example) you can make
better-informed decisions to improve customer experience
and retention.
■ Better understand the value of each customer
– Similarly, sophisticated loyalty measurements let you cross-
reference retention metrics with financial data.
– And that means you’ll have visibility of the cost of churned
customers as well as the financial impact of retention.
■ Prove the value of your loyalty program
– Solid metrics give you the power to prove your worth.
– If there’s any internal resistance to your loyalty program,
knowing the return on your investment will be crucial.
 Measuring Customer Loyalty
1. Customer Retention Rate
■ Customer retention rate (CRR) is the percentage of customers
that you have retained across a particular time frame.
■ We can calculate your customer retention rate with a simple
formula:
[(E-N)/S] x 100
where:
– S is your existing customers at the start of the given period,
– E is the total customers at the end of that period, and
– N is the number of new customers added.
■ So, if you’re calculating retention across a year, start by
identifying your total number of customers at the end of that
year (E). Let’s say it’s 200.
■ Then, minus the number of new customers from that year (N),
who say add up to 50.
■ But you had 300 customers at the beginning of the year (S).
■ In this case, your customer retention rate would be (200-
50)/300 = 0.5. Multiplied by 100 gives you a 50% retention
rate.
■ What this metric doesn’t do is inform you of why customers are
loyal.
 Measuring Customer Loyalty
2. Net Promotor Score

■ The metrics above are useful for benchmarking your retention

and loyalty efforts. However, to understand the reasons behind
your loyalty figures, you need something more sophisticated.
■ Typically, we may use Net Promoter Score (NPS), the customer
experience metric that’s monitored by the majority of Fortune
1000. NPS measures the likelihood of customers
recommending your product or service to others — a key
indicator of future revenue growth.
■ It works by asking a simple question: On a scale of 0-10, how likely
are you to recommend our product/service/brand to a friend or
colleague?
■ The responses to the question are then used to categorize your
promoters, detractors, and passives. Promoters (who rate you 9 or
10) are your most loyal and enthusiastic customers, while
detractors (who rate you 0-6) are at high risk of churn.
■ By subtracting your percentage of detractors from your percentage
of promoters, you’ll get a score from -100 to 100. This is your
overall NPS score and it’s an incredibly accurate barometer of your
customer loyalty.
■ But what NPS doesn’t do is give you insight into how customer
loyalty directly affects your revenue.
3. Customer Satisfaction (CSAT)
■ These days, customer satisfaction (CSAT) surveys are used a little less
often than NPS.
■ 41% of B2B brands use NPS, compared to 26% that use CSAT. While
NPS comes with substantial benefits, CSAT can still be extremely
useful for understanding your customer retention.
■ Typically, in a CSAT survey, you’ll ask customers how satisfied they are
with a particular interaction. This isn’t the most reliable indicator of
loyalty in the long term, but it does show you that you’re satisfying
your customers’ needs — and that’s an important gauge in itself.
■ Simply ask “How satisfied are you with [x]?”, where [x] is a part of your
customer journey.
■ Then receive responses on a 10-point scale. We can use it alongside
NPS for the best results!
4. Customer Effort Score
■ Another commonly used customer experience metric is
Customer Effort Score (CES). This works on the assumption
that the more difficult interaction is with your brand, the less
happy your customers will be (and the less likely they’ll be to
make another purchase with you).
■ To measure this, customers are asked a question such as:
■ How easy was it for you to solve your problem today?
Alternatively, ask them to agree or disagree with a statement
like: It was easy for me to solve my problem today.
■ To be really useful, CES needs to be combined with a follow-up
question, so that you can understand why customers feel the
way they do.
5. Engagement
■ There’s one important way to measure and predict customer loyalty
that often goes overlooked. That’s engagement.
■ Typically, we can say that the higher a customer’s engagement is
with your brand, the more likely they are to continue to be your
customers into the future. On the flip side, an absence of signal,
meaning no engagement whatsoever, is a powerful predictor of
churn.
■ You can track engagement rates simply by monitoring the following:
a. Survey responses.
– If your customers aren’t responding to surveys at all, it might be
a sign that they’re not happy with the service they’re receiving.
Not all detractors tell you they are detractors!
b. Support requests.
– The number of support tickets customers file flags some
important things. If there are too few, customers may not be
using the product as much as they could (which is a signal
of churn risk). Too many, though, and your customer may be
having persistent problems, which may reduce their chance
of sticking around.
c. Usage and activity
– You can track activity on different customer accounts by
monitoring logins. If your product is not being used, it’s
unlikely that customers will stay loyal.
6. Repeat Purchases and Referrals
■ Finally, it’s worth remembering the three very simple indicators that can help identify
most loyal customers:
a. Repeat purchase
– The definition of a loyal customer is that they make repeat purchases. To
monitor the loyalty of a particular customer, tracking purchases from individual
accounts is a must.
b. Upsells
– Satisfied customers are known to spend 140% more. However, 47% of B2B
brands aren’t measuring upsells or cross-sales. This means that they don’t know
which customers are having the biggest impact on their business.
c. Referrals
– In the NPS system, promoters are your most loyal customers, identified by how
likely they are to recommend your brand. As a business, you should be
transforming likely referrals into real referrals, by setting and measuring your
referral campaign.
 Customer Categorization
■ Customer Categorization/Market segmentation is the activity of
dividing a broad consumer or business market, normally
consisting of existing and potential customers, into sub-groups
of consumers (known as segments) based on some type of
shared characteristics.
■ In dividing or segmenting markets, researchers typically look
for common characteristics such as shared needs, common
interests, similar lifestyles or even similar demographic profiles.
■ Categorization requires selection of relevant variables to
segment the market or customers.
■ There may be a large number of variables that can be used to
differentiate customer of a given product/service category.
■ Demographic variables essentially refer to personal statistics
such as income, gender, education, location (rural vs. urban.
East vs. West), ethnicity, and family and so on.
■ Taking this a step further it is also possible to segment on
psychographic variables like lifestyle and values. For example,
some consumers want to be seen as similar to others, while a
different segment wants & to stand apart from the crowd.
■ Another basis for segmentation is purchase behavior.
■ Some consumers are brand loyal and tend to stick with their
preferred brands even when a competing one is on sale.
■ Some consumers are price sensitive and buy the lowest
priced services; others are service sensitive and want
more peripherals attached with the core service.
■ One can also segment on benefits sought essentially
bypassing demographic explanatory variables.
■ For example, some consumers use toothpaste primarily
to promote oral health, while another segment is more
interested in breath freshening.
Demographic
■ Demographics are the most common form of segmentation.
They divide customers by the structure of certain population
traits: Age, Gender, Income, Occupation, Marital Status, Social
Class, Religion, Education etc.
■ An example of marketing segmentation using demographics is
to combine age and income information to target older, wealthy
retirees looking to relocate.
■ Another demographic strategy would be marketing fantasy or
war-based video games primarily to younger individuals ages
18-30.
Geographic
■ Regional demographics can help you sell products and
services, depending on where your customers live: State,
Country, College, Community, International Marketing.
■ Colleges looking to sell sports merchandise will sell items well
within the state, but not so well outside home territory.
■ Larger, non-collegiate conglomerates such as the NFL
(National Football League) can expect a wider customer base in
North America, but don’t need to bother merchandising as
much overseas.
Psychographics
■ Psychographic or lifestyle segmentation targets customer
hobbies and interests.
■ This segmentation strategy caters to the most niche markets,
where attractiveness, quality, and brand recognition are more
important than price: Interests, Social Status, Personality Type,
Attitudes, Opinions, Values
■ One example of a psychographic segmentation strategy would
be to target high-end musical equipment to music enthusiasts
that want to collect the best gear or equipment as a status
symbol for showcase collections.
Behavioral
■ Behavioral segmentation is relatively new in the digital age and takes
into consideration information a company has collected through
customer data reports, surveys, or marketing trends: Patterns of Use,
Price Sensitivity, Brand Loyalty, Benefits Sought.
■ Consumers want the best brands at the best prices, and their buying
patterns predict items and services they are more likely to buy.
■ Amazon.com algorithms track your purchases and know that if you buy a
book on grilling, you may also like to buy seasoning or barbecue tongs.
■ Restaurant menus are also broken up into price levels based on
behavior, featuring specials, and seasonal items.
 Loyalty Schemes
(Getting close to customers by different means)
■ Customer loyalty programs reward customers who repeatedly
interact with a brand.
■ It’s a customer retention strategy that encourages customers to
continue buying from your brand rather than competitors.
■ The more a customer buys or engages with the brand, the more
rewards they earn.
■ With a loyalty program, companies can offer points or benefits
to customers.
■ And in return, they redeem points for discounts, free products,
rewards, or insider perks.
 Loyalty Schemes
(Getting close to customers by different means)

■ Running a customer loyalty program means you’ll need to give

away something.
■ The goal is to motivate repeat purchases and build trust
between customer and business.
■ Be it discounts, sales, early access, etc. But the payoff for
having rewards programs are huge.
■ But not every loyalty program is the same. There are different
types of rewards programs you can use to build customer
loyalty and earn repeat purchases.
 Types of loyalty programs

■ Points-based loyalty programs

■ Tiered loyalty programs
■ Paid loyalty programs
■ Value-based loyalty programs
1. Points-based loyalty programs
– Most common type of rewards programs.
– They let customers accumulate reward points they
can redeem for freebies, cashback, perks, etc.
– Customers don’t just earn points from purchases.
– They can also earn points from sharing on social,
leaving reviews, having a birthday, or through
gamification.
2. Tiered loyalty programs
– Tiered customer loyalty programs are a type of
membership where customers get different benefits
depending on their rank.
– Businesses often rank membership into groups
depending on certain metrics like sales or
engagement.
– These customer rewards programs give customers a
goal.
– The higher their tier, the more exclusive and better
rewards they’ll receive.
3. Paid loyalty programs
■ Paid loyalty, or fee-based loyalty programs, give customers immediate
and ongoing benefits for a participation fee.
■ These fees can be recurring or one-time.
■ Paid programs may need to require proof-of-value to get signups, but the
business can gain higher customer value from members.
■ A recent report by McKinsey shows that consumers are 62% more likely
to spend more on a brand after joining a paid loyalty program.
– The benefits clearly outweigh the fees, which encouraged sign-ups.
– Members stick around for more experiential advantages, like
personalized experiences and members-only content.
– Engagement levels are high. Good paid programs have a continuous
flywheel of interaction that elevates the program's value.
4. Value-based loyalty programs
– The idea behind a value-based loyalty program is to connect
with customers on a deeper level.
– It involves donating a percentage of purchases to charity or
welfare programs.
– You can offer multiple options for different charities to
choose from or have one that genuinely aligns with your
customers’ values.
– This program doesn’t actually reward customers. But it
holds a special place for them, as the rewards are used to
benefit society.
– Brands often create a hybrid loyalty program using this
model.
 Customer Value Co Creation
■ Value co-creation is defined as a joint venture in the production
process that actively involves consumers in creating value-
added work and on-demand products.
■ Value co-creation is a joint process that takes place on a co-
creation platform involving a service provider and a customer,
where the service provider's service (production) process and
the customer's consumption and value creation process merge
into one process of direct interactions.
■ A synergistic process of creating, delivering, and exchanging
value with key actors involved in service/goods consumption for
mutual benefits through symbiotic relationship.
■ Value co-creation continues to be a key issue in the era of
marketing.
■ The emergence of centric business models gave rise to value
co-creation in marketing.
■ Value-added work consists of adding a product function to
make it more purchasable.
■ The information gained through co-creation effectively drives
sales and consumer engagement in marketing.
■ Value co-creation enhances collaboration.
 Benefits of Customer Value Co Creation
■ It promotes the creation of advanced products that encompass
the desires of customers.
■ It enhances the bottom line for companies, leading to better
financial performance.
■ It encourages new ideas and innovations which may not
necessarily come from staff.
■ It makes the consumer part of the production process,
encourages customer loyalty, and helps companies increase
their workforce without adding payroll.
■ Value co-creation allows consumers to take part in the research
and development process.
■ It also involves consumers in product innovation and
production, making them feel part of the brand.
■ On the other hand, companies implement the ideas borrowed
from consumers.
■ Therefore, co-creation of value considers collaboration between
the consumer and a brand from the development of a product
till its purchase.
■ Co-creation of value allows collaboration of a creative process from the
design of a product to its purchase between consumers and a brand.
■ Co-creation incorporates a joint venture of activities such as research
and development, which is currently carried out through social media
platforms.
■ However, some companies prefer traditional surveys, focus groups, and
polls.
■ Other participants who may participate in co-creation are prospective
buyers, employees, industry influencers, suppliers, and competitors.
■ The information gained from all these participants is critical for driving
sales in marketing.
■ It also enhances consumer engagement, which builds on trust and
brand loyalty
 Customer Value Co Creation
Ways to Implement Co-Creation:
■ Various companies utilize various co-creation strategies that add value to their
brand.
■ One of the most common strategies is inviting employees and consumers to
participate in solving a problem or designing a brand. Some other ways include:
– Brands can engage with social media users as a co-creation strategy.
– Some ways include solving complaints, responding to customer questions, and soliciting
consumer content.
– Companies can also decide to share ideas on a website. For example, Starbucks
launched an initiative on its website called My Starbucks Idea.
– Other brands could also implement a co-creation strategy that uses a similar platform
on their websites. It would allow the customers a portal to submit new ideas and
feedback.
– Brands can use customer data for co-creation. For example, Nike uses NikeID to create
products designed by consumers. Accessing a customer database may be useful, but it
is not used in social media. Social media is a nice place to listen to consumers, engage
in community groups, and seek ideas and feedback.
 Customer Lifetime Value
■ Customer Lifetime Value (CLV) is the net profit that can be
attributed to a particular account over their relationship with a
company.
■ Extending the lifetime of a customer (i.e., retention) is
important for sustainable growth. After all, the value of a loyal
customer can’t be understated. Loyal customers…
– Stay longer
– Buy more
– Refer your brand
– Are less price sensitive
– Are easier to serve
– Provide constructive feedback
■ Companies can no longer rely on products and services to set
their brand apart from the competition. A focus within B2B on
amplifying experiences and more clearly translating business
outcomes is being given greater prominence.
■ Part of improving CLV is understanding the various areas that
can impact it. Having a deep understanding of the customer
journey, the touch points within it, and the impact on lifetime
value is necessary.
■ CLV is the net present value of the future stream of cash flow
attributable to a customer.
■ Companies can no longer rely on products and services to set
their brand apart from the competition. A focus within B2B on
amplifying experiences and more clearly translating business
outcomes is being given greater prominence.
■ Part of improving CLV is understanding the various areas that
can impact it. Having a deep understanding of the customer
journey, the touch points within it, and the impact on lifetime
value is necessary.
■ CLV is the net present value of the future stream of cash flow
attributable to a customer.
■ The equation for calculating the CLV is as shown:

■ N is the customer lifetime in years

■ Mn is the margin in year n, i.e. the revenue minus operating
costs
■ 1 / (1 + r)n is the discount factor (and r the discount rate)