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Loyalty Programs

How Do You Measure Your Loyalty Program’s Return On Investment (ROI)?

Written by 
Brad Davis
February 12, 2020

When someone is looking to spruce up their house before putting it up for sale, do they jump straight into the renovations, or do they first crunch some numbers to ensure that the cost of the renovations will be outshined by the additional profit gained from the increased house value?

Unless they’re a few Skittles short of a whole bag, you’d expect them to do the calculations first… The process is no different for a business owner considering a loyalty program to boost customer retention.

When someone wants to know if it’s worth implementing a loyalty program into their business, what they’re really asking is, “Will the ROI (return on investment) be greater than the cost to create and maintain it?”

This can be a tricky question to answer, because every business is different, and every loyalty program is different as well. So…

Let’s first determine the upfront and ongoing costs of your desired type of loyalty program.

paper punch cards to punch Card App

Loyalty programs used to be purely paper-based – a fat stack of paper punch cards sitting at the counter, available for customers to pick up and stuff into their wallets or shove into their glove compartment.

The printing costs associated with this system can be huge, while the ROI can be minuscule. Customers pick up these paper punch cards with the best intentions, then lose them in a pile of paperwork at home. Their loyalty is lost along with the card.And here lies the key issue with non-digital loyalty programs – there is absolutely no feasible way to measure your ROI.Customers take the cards, the pile on the counter gets smaller, your staff give rewards to any customers that have reached the redemption stage, but as a business owner you have no real way of measuring whether or this system is increasing revenue or haemorrhaging money.

Remember – just because someone is a member of a loyalty program, does not mean they are actively engaged by that brand. While the average American household is enrolled in 18 loyalty programs, it is only active in 8.4 of these.

In the debate of digital loyalty programs vs. traditional paper punch cards, this is where digital wins.

Digital rewards programs offer a wealth of data points that help the business to determine how often a customer makes purchases, how much they spend, what products they like, how long they’ve been a loyalty program member, and so on.

These data points also allow you to accurately measure your ROI, while the digital loyalty program itself can cost as little as $20 per month.

You can learn more about how much different types of loyalty programs will cost for your business here.

What about the other costs of running a loyalty program?

The upfront cost of creating and running a loyalty program is one thing, but then there are the rewards to consider as well.

Are you a restauranteur giving away a free side with every third purchase of a burger? Perhaps you’re a hotelier giving away a free night’s accommodation with every 10th night booked, or a yoga studio owner giving away free classes for every referral of a friend.

Every business will have a different model for points accruement and rewards redemption, as well as different rewards of varying value. It’s important to determine how much these rewards and discounts are impacting your bottom line, and to ensure that the revenue gained from these enticing offers outweighs it.

digital loyalty App on mobile

The bigger the rewards are, the higher your loyalty program’s costs are – but perhaps the bigger the yield is too, as a result of increased referrals, higher conversion rates and stronger engagement. This is the tightrope that every business owner with a loyalty program must walk.

Thankfully, those oh-so-wonderful data points we mentioned earlier can offer some clear-cut figures for your own peace of mind.

The three keys to measuring the ROI from your loyalty program.

When a new customer signs up to your loyalty program, there are three key factors that will help you put a dollar figure on the value of that customer’s loyalty to your business.

  • The frequency of their purchases
  • Their basket size (i.e. the average amount they typically spend per transaction)
  • Their “loyalty lifetime”

Ideally, a well-functioning loyalty program will be constantly working for your business around the clock to increase all three of these variables for each loyalty program member, right from day one.

Then there are the other factors that contribute to a loyal customer’s value, which perhaps aren’t as easy to measure.

For instance, how much extra business have you received as a result of word-of-mouth referrals, social media shares, positive online reviews, and so on?

multiplying customers through word-of-mouth

When successful, the ROI from a loyalty program is huge – especially when you minimise its costs, by opting for a loyalty app provider (the most affordable and convenient option for a loyalty rewards program).

With a digital loyalty app, you can easily monitor and track each loyalty program member’s frequency of purchases, average basket size and overall lifetime value.

This allows you to precisely calculate how much revenue your loyalty program is generating vs. how much it’s costing.

It also allows you to see which loyalty program members have stopped visiting your store or making online purchases lately, and perhaps tempt them back with a generous discount or invitation to sample a new product for free (sent via text, email or push notification).

What to look for in the data.

Once you’ve implemented your digital loyalty program and given it time to get off the ground, it’s important to regularly look at the data and ask yourself these questions:

Are customers redeeming rewards?

If you’ve got X number of signups in the last three months, but a low redemption rate, it means that customers are signing up to your loyalty program but then tapering off.Why is this? Are your rewards not enticing enough? Do the rewards require an unrealistic amount of points to acquire? Figure out why customers are losing interest in your loyalty program, and don’t be afraid to ask them via feedback forms.

Are customers purchasing more frequently since signing up?

If your loyalty program is worth its weight in gold, you should see a general pattern in your members, where the rate in which they make purchases is gradually accelerating over time.A customer should become more engaged with a brand with every interaction or “touchpoint”, and if they aren’t, your loyalty program might need a reshuffle. Again, feedback is king.

Are customers spending more per transaction since signing up?

The other pattern that should become noticeable in any decent loyalty program is a gradual increase in a customer’s ATV (average transaction value).

If you looked at Starbucks’ data from its colossally successful Starbucks Rewards program, I’m sure it would reveal that a large portion of customers who used to typically order a small latte now purchase Grande Caramel Macchiatos for almost twice the price per transaction (for example).

This is because the coffee chain’s loyalty program is specifically designed to encourage customers to try new products and upgrade each transaction. You can learn how to incorporate more of these kinds of strategies into your loyalty programs here.

When it comes to loyalty programs, it’s important to think long-term and big picture.

stacking coins in front of clock

Marketing strategies like PPC (pay-per-click) are extremely easy to measure. A business owner can clearly compare the costs of a pay-per-click campaign to the revenue raised from it.

But just because it’s easier to crunch the numbers, doesn’t mean these numbers are more agreeable than what you’d see from a loyalty program – especially when you consider that PPC is built on customer acquisition, whereas loyalty programs are built on customer retention.

Considering it costs five times more to acquire a new customer than to retain an existing one, customer loyalty is worth the investment.

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