Most businesses that I’ve come across use either CSAT or NPS to measure customer loyalty. Both systems provide a fair estimate of how your customer base is split into these two (out of 3 or 4) categories – ‘loyal’, and ‘trapped.’ Coupling these estimates with a few other business metrics (like ARPU, Churn rate, CLV, Renewal/ repurchase rate etc.) can give you very actionable insights to drive your CX strategy. Let’s pick one of these business metrics and see how the resulting insights can help your business.
Renewal or repurchase rates have become the beacon of customer loyalty, especially within the as-a-service/ subscription world. Simply put, it is the measure of retention of a customer. Towards the end of their journey your customers find themselves at the crossroads between the decision to renew or not. The renewal rate measures the percentage of your customers that chose the ‘renewal/ repurchase’ route. A good number of these customers fall into the ‘loyal customers’ bucket. They are delighted with your products or services and even recommend them to others. They are what you’d classify as ‘promoters.’ But a measurable number of renewals can come from customers who are trapped – the detractors. They merely renew or repurchase because of high switching costs or lack of competition. Not only will they not recommend your product or service but also let others know about their sub-par experiences.
Many of us have done business with a brand under these circumstances. For example, I feel trapped by my cell phone or cable provider and would love to switch right away. I can’t because a) I’m bound by a contract with significant early termination penalties, and b) the alternate options aren’t any great either. Will I recommend them to anyone? Absolutely not. As a matter of fact I’ve told several people about my experiences with the providers. But I’m sure some folks within the marketing or CX organizations of these businesses don’t get that (or care) and count me as any other renewing customer.
When detractors are not correctly accounted for correctly, the KPI’s and resulting insights can be skewed. The CX improvement/ transformation decisions based on the insights can be flawed. The use of ‘renewal rate’ as an indicator of CX improvement can be misleading unless renewals by trapped customers is taken into account. Take the example shown below in Fig 1. The business managed to eke out a gain in renewal rate (in aggregate). Upon closer look (A to B) we see that the gains came almost entirely from detractors. The CX team used the ‘improvements to renewal rate’ as a measure of the initiative’s success. It probably touted this success to get approval for more such initiatives.
Ideally any CX transformation initiative should a) reduce % of detractors and increase % of promoters (or convert detractors to promoters) in a significant way, or b) strive to increase the renewal rates among promoters as shown below in Fig 2 (A to C). CX improvements resulting from such initiatives clearly indicate improvements in customer loyalty.
In both examples (shown above), the business showed an improvement in the aggregate renewal rate. But looking under the hood – at the renewal rates for each segment – we can see that the second example is a more desirable outcome for any business. It substantiates the claim that customer loyalty can be improved through strategic CX enhancement/ transformation initiatives. It is also more sustainable for the business and ultimately more desirable by its customer.