Have you heard of the 80/20 rule, aka the Pareto principle? The basic idea is that in many cases, 80% of outcomes can be attributed to 20% of the causes. Applied to frozen yogurt, it suggests that 80% of revenues come from 20% of customers.
While the Pareto principle may not always apply and the ratio may deviate from the 80/20 rule, the idea that some of our efforts yield much more than others makes sense. Not everything we do is highly productive. And not every customer is equally valuable. For most frozen yogurt shops, repeat business from its loyal customer base is the key to success.
The Value of a Loyal Customer
In our 2018 National Frozen Yogurt Consumer Survey, we asked respondents “how many of your frozen yogurt shop visits are visits to your favorite shop in your area?” We found that 42% of respondents reported visiting their favorite shop in the area over 75% of the time and 13% reported that between 50% to 75% of their visits were to their favorite shop. The survey results suggest that most frozen yogurt customers are loyal to their favorite shops.
Why are loyal customers important? It’s said that acquiring a new customer costs 5 times (Invesp Consulting) to 16 times (MarTech) more than retaining an existing customer. It’s also easier to sell to an existing customer, someone who knows and likes your shop. According to the Invesp survey, the probability of selling to a loyal customer is 60-70% compared to 5-20% likelihood for a new customer. Research by Frederick Reichheld of Bain & Company found that increasing customer retention rates by 5% increased profits by 25% to 95%.
Loyal customers can also be valuable brand advocates. These are the people who are passionate enough to tell others about your shop. They help grow your business through positive word of mouth.
How to Measure Customer Loyalty
There are numerous ways to measure customer loyalty, but they break down into three types of measures.
Purchase behavior
Purchase behavior can be measured by looking at actual or projected spending. Actual measures include amount spent, frequency and recency of purchase visits, amount spent per transaction, and share of wallet (how much is spent at your shop vs. the competition). Customer lifetime value is an estimate of how much a customer might spend over a lifetime of patronage. However, purchase behavior may not capture how much a customer likes your shop. For example, someone may visit your shop regularly because there are no alternatives in the area.
Customer satisfaction
The assumption behind measuring customer satisfaction is that satisfied customers are more likely to be loyal, repeat customers. Measuring customer satisfaction alone is not enough because customers can be satisfied without being profitable. For example, someone may have visited your shop while on vacation and while she liked your shop, she is unable to visit on a regular basis. Or a once loyal customer may have moved to another state.
Referrals
Customer loyalty can also be measured by asking customers if they’ve referred others to your shop or would be willing to refer your shop. One well-known and popular referral measure is the Net Promoter Score. The NPS score is calculated based on the responses to one question, “How likely is it that you would recommend our company/product/service to a friend or colleague?” on a scale of 0 to 10. One of the critiques of this score is that it asks about likelihood of a future behavior. Someone who responds 10 on the survey may never recommend the company/product/service to anyone.
The bottom line is that there is no single perfect measure of customer loyalty. It’s best to use more than one measure of customer loyalty, since each measure has potential shortcomings.
In our next post, we will discuss how frozen yogurt shops can cultivate and grow their loyal customer base.
