When Does Loyalty Begin?

We all love industry averages.  We get the “what’s the industry average?” question often for a variety of metrics – response rates, open rates, time intervals, customer sign-ups, you name it.  Everyone wants a benchmark number for comparison.  So here’s a question…what’s the industry average for the number of purchases it takes for a customer to become loyal?  In other words, “When does loyalty begin?”  Of course, the answer is the same as the answer to most questions:  It depends.  For a single business, we answer that through data analysis.  But is there an overall number?  3? 5? 10?

We thought it was an interesting question, so took a few hours to patch together a simple analysis.  We analyzed some data from 10 clients, just to see what it shows.  Surprisingly (or not?) the results were fairly consistent.  First of all, here was our down and dirty methodology…

  1. Looked at purchase activity for 10 businesses. These were from various industries, including retail, entertainment, hospitality, casino, online ecommerce.  Just an unscientific mishmash really, of data we had available.
  2. Analyzed customers after their first visit and noted what percent came back again within a defined timeframe. Then analyzed the percent of customers returning after their second visit.  Then analyzed third visit retention rate, and so forth up to ten.
  3. The “defined timeframe” for the next visit varied based on the industry. It was whatever made sense for that industry.  Could be short (3 months) for local casino players, who typically have a high frequency, to long (2 years) for some durable product retail brands.
  4. Graphed the results and looked at the overall trend.

As mentioned, the results were fairly consistent.  There was a steep upward curve for a few visits, followed by a more modest uptick.  So, here’s what we found…

In most cases, we can see the typical curve. In the cases where we have a more consistent line (yellow and blue), that’s rewards program data for members.  In the case of the yellow line, some of those customers actually paid for the membership, so we expect them to have a higher initial retention rate.

Typically, we see a range of 25%-45% of trial customers returning for a second visit.  So that points to a real opportunity.  Looking at the other end of the chart, we see a tighter range of 80%-90% of 10x visitors returning.  So, there is definitely some love in that room!

To make it easier, we then averaged out the ten lines.  Here are the results…

We can clearly see the steep incline until we get to the 4x buyers, after which the line continues to move up, but at a slower pace.  The average 1x retention rate shows about 42%, which in reality is on the high end due to some high loyalty entries.  Remember, most of this is data from loyalty marketing programs, so there is a self-selection bias at play.

A 50% retention rate happens after the second visit.  And after 4 visits, the line starts to flatten out.  On average, 75% of your 4x buyers will return.  At 6 visits we cross the 80% threshold.

So…where does loyalty begin?  If we define loyalty (in transactional terms only – not any emotional factors) as 75% of your customers being retained, the answer is 4 purchases.  If we are a bit stricter, the answer is 6 purchases.

Remember, this was a fairly simple analysis patched together with whatever qualified data was readily available.  But we thought the results were interesting, show a consistent pattern, and seem to validate “gut feelings” about retention and loyalty.

We use this for clients to help determine the appropriate loyalty strategy.  There are specific key indicators in these charts, such as the first purchase (trial) retention rate.  Also, the steepness of the incline and point at which the line flattens point to the loyalty strategies and tactics that will work best.

Have you gone through this exercise with your customer data?  What does your retention rate pattern look like?  Once you have your graph completed, look at the number of customers at each purchase level.  That will show you the opportunity you have.

Find your magic number and work to get as many customers as possible to that level.  Even if you can get 10% more customers to 4 visits (or 6), the value to the bottom line will be tremendous.

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