How to measure the ROI on Loyalty

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A customer loyalty programme touches every facet of your business to drive customer engagement at all points of customer interaction. This is no small investment both in terms of time and money. It’s critical to have buy-in from the entire company, from the top down. I often liken a loyalty programme to a child; it needs a lot of care and nurturing from the whole family in order to thrive.

 MeasureROIonLoyalty

But how do you know if your loyalty programme is really working, that your investment is delivering true value to your company? Traditionally, marketers have shied away from measuring the ROI of their loyalty programmes, regarding it simply as a marketing cost. But now, digital loyalty platforms do all of the heavy lifting in terms of reporting so just as we measure cost per leads, click-through-rates etc, we can also measure the ROI on loyalty.

It can be difficult to measure exactly the incremental sales generated by a loyalty programme, especially when the proposition is available to everyone and the offer isn’t linked to transactions. While the ROI calculation itself is very simple, you need to find the right variables to include in your calculation.

There are several routes to achieving this goal. Remember, set your KPIs from the outset so you know exactly what you’re measuring against. Here are some key metrics to use to measure the ROI on loyalty:

 

Registered Customers – Members Vs Non-Members

A basic KPI to start with is registration numbers; how many users (customers, households etc) have signed up to your loyalty programme? Take a look at the data in context to determine what your rate or registration is and notice how support marketing activity like a competition or an above-the-line campaign impacts on those registration figures.

Establish what your registration goal is – an example is “We anticipate that 20% of eligible customer base will be registered for the programme by the end of Year 1”. You can then compare behaviours of members versus non-members. You should see that a gap in frequency and order value between members and non-members should exist. Even though marketers can’t attribute the entire gap to incremental lift, it does provide a quick, easy-to-calculate read on the upper range for approximating incremental lift.

 

Redemptions - Active Vs Inactive Members

So you now know how many members you have got. But how many of them are active and redeeming rewards? A customer will only engage with a programme that they see value in so monitoring how they interact with the programme is key to determining how the programme is performing. Look at the return visits of your members, how many log in 3+ times, enter competitions, redeem rewards, stay on your site etc. Compare these stats with the number of members who possibly signed up initially and never engaged again. If you’re continually keeping your programme fresh and relevant, your number of engaged customers should heavily outweigh your inactive members.

 

Reduction of your Churn Rate

Your churn rate is the proportion of customers who leave or stop using a business during a certain time period. Churn is measured because it’s a possible indicator of customer dissatisfaction, cheaper or better offers from the competition or more successful sales and marketing by a competitor. Since customer experience is very important to customer retention, a solid loyalty programme can have a huge impact on churn rates. It’s critical to track your customer churn over time.

To calculate your churn for a given period of time, take the number of customer you lost during the time period and divide it by the number of customers you started with during that same time period. The resulting percentage is your churn rate.The goal is to reduce your churn rate over time by creating a better customer experience through your loyalty programme so it’s important to track this metric before launching your customer loyalty marketing programme as well as during to understand its success.

 

Repeat Customer Growth

Another key metric is the repurchase ratio which measurers the ratio of repeat purchases against a one-time purchase. This can be one of the top indicators of customer loyalty and company growth. It’s a way to measure the amount an existing customer spends and how much that amount can increase or decrease based on additional purchases – either within or across your product offerings.

To actually calculate this, you divide the number of customers who bought more than once in a 365-day period, by the total number of customers. This gives you the repeat purchase ratio (repurchase ratio). It’s an important number – because knowing your repeat purchase customers are extremely profitable, and are more likely to make another purchase. Taking a deeper dive enables you to see if your loyalty members are likely to be repeat customers and allows you to make a correlation between your loyalty programme and repeat purchase behaviour.

 

Increase in average transactional value and purchase frequency

A loyalty programme is one of just a few solutions that effective at boosting both order value and purchase frequency by encouraging additional spending with points or incentives. You should see an increase of ATV amongst loyalty programme members vs. non-members as customers see the points or incentives as more valuable than they really are which leads to a greater return than using actual money. These considerations will keep customers coming back and make them want to spend more, which is exactly what you’re looking to accomplish. It should also have a similar impact to how often your customer transacts with you.

 

These are some key metrics to use when measuring ROI but there are many more. Remember also to simply ask your customer for feedback in terms of how they value your programme. Build in customer feedback incentives into your programme. Their advocacy, or lack of, can give you a serious insight into why your loyalty programme is or is not delivering an ROI.

Keep in mind that you should have more than one measure so that you can triangulate performance and be confident that the programme is working. From the outset, set your metrics and be transparent on how you will measure these. Remember to be realistic about what the loyalty programme can reasonably deliver within a timeframe. In many cases, a loyalty programme is a slow burner and takes time to gather momentum. However, if you have agreed metrics in place that allows you to see steady growth and an increase in incremental revenue that you can attribute back to your programme, you can measure the ROI on loyalty.

Checklist for your Loyalty Programme

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