Are your loyalty programs delivering value the business demands – and how do you know whether they are or not? Measuring the effectiveness of loyalty programs is a multi-faceted task. Get each element right and the rewards can be significant.
“If you can’t measure it, you can’t improve it” – the quote from Peter Drucker, widely regarded as one of the great management consultants, is true across different business functions within an organization but more so for the marketing department. Marketers can no longer allocate budgets based on their instincts. With digital marketing and wide proliferation of data, business leaders are increasingly looking for metrics and evidence to determine success and make necessary course correction in the loyalty journey. To gather this evidence, marketers must look at both the functional and emotional aspects of a program, taking account of incrementality and the long-term increase in customer lifetime value.
Getting loyalty programs right
Loyalty programs are nothing new. While it is true that bigger and better discounts and rewards can attract customers, over the long term this is damaging to the business. Negative consequences include a poor brand perception and customers becoming conditioned to delay purchases in anticipation of discounts. According to an HBR study, 72% of survey respondents say optimizing customer loyalty is a top five senior management priority for their organization. At the same time, 49% say that the challenge of maintaining customer loyalty for long periods of time is the top hurdle to building customer loyalty programs. Sephora’s Beauty Insider is a good example of a loyalty program that has revamped itself over time and continues to be popular among its customers. The program offers redeemable points for dollar purchases, free birthday gifts, and spend-based tiers and experiences through its Rewards Bazaar and exclusive events, among other things.
Why emotions matter
To stay effective, it is critical that organizations measure the value of their loyalty program regularly. As noted above, while it is important to look at the functional aspects of loyalty, the emotional side must also be a factor. Emotionally engaged customers spend more, have high propensity for brand recall, and promote brands they are loyal to. The following metrics are just a few of those that can be used to help evaluate the functional and emotional aspects of loyalty programs.
Determining lifetime value
While these metrics will help you get started on your journey to measuring a loyalty program’s success, there is another important step that we recommend, which is to develop the capability to determine customer lifetime value. A strong loyalty program should sustain and grow this value over time. However, lack of in-house skills, the high cost of monitoring, and complexity in building a customer lifetime value model are among the reasons organizations stay away from investing in customer lifetime value. We hope that the following outcomes might encourage more organizations to invest in it:
Organizations can quantify the value of a loyalty program by computing the financial lift. In simple terms, lift can be calculated as follows:
Program Contribution = Incremental Spend minus Loyalty Discounts minus Program Costs minus Cost of Goods Sold
Calculating financial value
Using a mix of test and control wherever applicable (e.g. for campaigns only targeting loyalty members) and modeling (e.g. for members retained in a loyalty program, for new member acquisition, etc.), the lift for different loyalty program components can be determined. When added together, these can provide the overall financial value. This is especially helpful in cases where a new loyalty program has been established and marketing wants to get a sense of the financial lift in a relatively shorter time frame.
Smarter, insight-driven decisions
Building the model that calculates customer lifetime value is one thing but using it effectively is another – this requires partnership among teams, change management, and leadership support. Further, while metrics and measurement are important, how we embrace these metrics and what we do with them ultimately drives the business benefit. Empowering employees to use the metrics, enabling collaboration between different teams by using common metrics and focusing on behavior that will yield great outcomes, is essential. This, along with quick test and learn cycles, will enable organizations to make smarter and more insight-driven decisions when it comes to re-designing their loyalty programs.
Managing Consultant, Insights-Driven Enterprise (IDE),