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Customer Loyalty

What is the Value of a Loyal Customer?

Written by 
Brad Davis
February 5, 2020

Any business should know that loyal customers are valuable, but not every business bothers to calculate the actual monetary value of a loyal customer.

In fact, the point where many businesses go wrong is to place more value on acquiring new customers, and neglecting their existing ones.

So, first thing’s first… let’s distinguish a loyal customer from merely a repeat customer.

New customers, repeat customers and loyal customers… What’s the difference?

benefits of digital

Needless to say, the first impression a brand new customer has with your business will directly influence whether they ever come back or not. However, just because they do come back, doesn’t mean this impression is now set in stone!

Your business might enjoy a healthy pool of repeat customers who regularly visit your shop, browse your products/services online, or consistently engage your business in some other way.

While these customers are highly valuable to your business, they’ll never be as valuable as loyal customers. Why?

There is no way of knowing what repeat customers’ motives are for returning unless you actually quiz them.

Their decision to shop with your business could boil down to convenience, proximity to home, the fact that you have the cheapest prices, excellent customer service, or countless other factors. 

And while some of these factors are certainly flattering and you should give yourself a pat on the back, it only takes one bad customer service experience, one price increase, or for a similar shop to open even closer to their house, and suddenly you’ll never see this customer again.

A customer can only be considered loyal once they develop an emotional connection with your brand.

Perhaps they specifically shop with you because your business only sells sustainable products, or because your staff always remember their order from memory, or because you offer them both incremental and spontaneous rewards to show them that you appreciate their loyalty.

Once you start communicating with your loyal customers (we’ll explain how to do this shortly), you can determine their motives for continuously coming back, and thus ensure that you continue to deliver on those things.

How much is a loyal customer worth?

how to create customer loyalty in a business

What’s that old saying about, “Loyalty can’t be bought or sold, only earned”? Well, once you earn a customer’s loyalty, it’s worth a heck of a lot!

Not only does the success rate of selling to an existing customer (60-70%) far outweigh the success rate of selling to a new customer (5-20%), but a 5% increase in customer retention can increase profits by as much as 125%.

Why is this?

Loyal customers are more forgiving of mistakes and slip-ups, because they have got to know your business and its staff over time. They understand that mistakes happen.

For this same reason, loyal customers are more likely to give honest feedback, and their feedback is likely to be much more useful than feedback from a one-time customer.

Loyal customers are generally more willing to try your new products, and act as guinea pigs for your trials and sales experiments.

They’re also much more likely to recommend your business to friends, and become advocates for your brand – free marketing, which is the best kind!

With younger generations proving to be more influenced by peer endorsements than traditional advertising, brand advocacy is increasingly important.

When measuring the lifetime value of a loyal customer, all these things need to be taken into account.

It’s not just the dollar amount that the customer has spent with your business, but what new customers you’ve acquired as a result of that one customer’s loyalty Also how those loyal customers have helped you shape and evolve the business, and so on.

So, we’ve established that loyal customers bring in more money. But how expensive is it to create and hold onto these loyal customers? Are they worth more than what it costs to secure them?

How much does a loyal customer cost?

how much is a loyal customer worth

Well, let’s start with Invesp’s recent findings that acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one. So straight away, it costs far less to keep your existing customer base satisfied.

When you consider the costs of traditional advertising methods vs. the free marketing that comes from having a solid pool of loyal customers endorsing your brand, it’s no wonder.

Pair this with Bain & Company’s findings that existing customers spend 67% more than new customers, and you’ll see that it’s not about how much cheaper customer retention is than customer acquisition… it’s how much more profitable loyal customers are for your business.

Indeed, earning a customer’s loyalty used to be a costly exercise. These days, it’s within the budget of even the smallest businesses. And below, we’ll tell you how.

Is the cost of a loyalty program worth the long term value of a loyal customer?

creating repeat customer loyalty

It used to cost a lot more to create and maintain a loyalty program. Whether that's a large-scale digital loyalty program operating across thousands of stores worldwide, or the classic paper punch card system embraced by small independent coffee shops, barbers and nail salons everywhere.

These days, businesses can even spend less than $20 a month to offer their customers a convenient mobile app-based digital loyalty program. 

As an example, the Stamp Me app allows merchants to offer enticing rewards, communicate with their customers, build brand loyalty, use customer data to gain valuable consumer insights and countless other features and functions.

The lifetime value of a long-term loyal customer is exponentially higher than the costs of running a digital loyalty app, which is why the rate of which new businesses are creating loyalty programs is rapidly rising.

So, in a nutshell… are loyal customers worth the investment?

Regardless of whether you’re the CEO of a multinational retailer, or the proud owner of small suburban hair salon, the answer is yes!

The overall cost of building brand loyalty through a rewards program is well worth the opportunity to directly communicate with your customers, offer tailored rewards that appeal to their specific preferences, increase brand engagement and keep them coming back time and time again.

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