Customer retention has long been considered a key metric in determining customer loyalty. After all, if a customer keeps coming back year after year, they must be loyal, right? However, the truth is that customer retention is not always an accurate measure of customer loyalty. In fact, retention is a lagging indicator of customer behavior and a result of loyalty, not a measure of it.
Consider the example of credit cards. How many of us carry multiple credit cards in our wallets? And how many of those cards do we actually use on a regular basis? Just because a customer is retained by a credit card company does not mean that they are engaging in robust loyalty behaviors such as giving a greater share of their wallet or providing value pricing.
In some cases, customers may even be "hostages" of a particular company, meaning they would defect if given the option. For example, consider what happened to traditional telephone companies when cellular providers entered the market. Customers who had been with their telephone company for years began leaving in droves once they had other options available to them.
Even loyalty programs are not a reliable predictor of true loyalty. While rewards, tiered memberships, and other incentives may encourage customers to keep coming back, they do not necessarily lead to more loyal behavior. Instead, they are often seen as discount programs that offer product equity bonuses for sticking around.
What does this mean for businesses that want to build true customer loyalty? The key is to focus on increasing sales equity, which involves creating products and services that deliver real value to customers. When customers feel that a business is providing them with exceptional value, they are more likely to become truly loyal, returning again and again, and even recommending the business to others.
So, while customer retention is certainly important for businesses, it is not always a reliable measure of true customer loyalty. To build real loyalty, you need to increase your sales equity. Read more about sales equity here.