Do you know how to measure the dollar value of loyal customers? There’s a lot of buzz online about small business customer loyalty – how to create it, mistakes that destroy it, how much it’s worth to a business, and even the psychology behind it.
We know we want loyal customers, but we aren’t really sure how much.
Measuring and tracking customer loyalty has become a task that many small business owners recognize the value of, but either aren’t sure how to do or believe it’s more time consuming than it really is.
Measuring the value of loyal customers can get really complex, really fast – especially when you start bringing in outside factors like the customer lifetime value formula does:
It’s possible to get an accurate read of the dollar value of loyal customers without inputting numerical values into complicated formulas that rely on statistical averages and historical data in the small business sector.
The First Purchase Rule predicts value of loyal customers
Harris Interactive partnered with the U.S. Chamber of Commerce to complete a study of 1,409 small business owners and executives with an annual company income of less than $25 million. The results give a clear solution for determining the actual dollar value of loyal customers.
The study found that on average, loyal customers are worth up to 10 times the dollar amount of their first purchase.
Exceptions to the rule
Simple enough, right? Let’s look at a few examples to determine the value of loyal customers in different buying scenarios.
- If a customer that will become loyal spends $60 on their first purchase, how much would the loyal customer be worth over the customer relationship lifetime?
We know that on average, a loyal customer is worth up to 10 times the dollar amount of their first purchase – not necessarily that exact amount, but it will give a ballpark estimate that is still useful for your calculations.
If the first purchase is $60, just multiply that number by ten to get the estimated MAXIMUM dollar value of the loyal customer – in this case, the customer value would be up to $600.
Important: While using the maximum dollar value of loyal customers might feel good when you’re calculating profit projections, don’t make that mistake. Some of your loyal customers will translate to their maximum calculated value, yes, but most of your loyal customers won’t, even if they do come very close. Remember to rely on these calculations only for broad estimations and not true projections.
2. A customer who will become loyal spends a large amount on their first purchase – an above ground swimming pool, filtration system, pool vacuum, weighted pool steps, a variety of floats and pool toys, and a 5 year warranty. Would the ‘first purchase rule’ be applicable here? Why or why not?
Considering that the average above ground pool purchase, installation, and setup costs about $3,000, if we include all the extras the customer bought, we estimate this first purchase at $4,000. Using the ‘first purchase rule,” that would mean this customer would be worth up to $40,000 over the course of the relationship.
That’s a little too good to be true, isn’t it? Yes. There’s an exception to every rule, and if you were looking for the exception to this one, you found it. There’s something different about this purchase from the purchase in Example 1. Once this customer makes it out of the pool and spa store, they won’t need to return for a long time.
While they may never visit a competing pool and spa store, they also may never visit this store again. If they do, it will likely be to purchase small items like pool toys, chemicals, or patio furniture. A large purchase like this is not indicative of a customer’s lifetime value.
Customer Experience Impact Report by Harris Interactive