How to Calculate the Return On Investment (ROI) of Loyalty Programs?
Customer loyalty is priceless as it directly impacts company profits. Both global brands and small businesses are ready to pay a lot to get it by figuring out a rich loyalty strategy that ensures long-term customer retention. The question is: where is the limit? The answer lies in the Return on Investment (ROI) of a loyalty program. But how to calculate it?
- How to measure loyalty program ROI.
- How to optimize a loyalty program performance.
- Other ways to build customer loyalty.
How to calculate the Loyalty Program ROI?
Launching a loyalty program should bring clearly defined business benefits. Like any other marketing and sales activity, a customer loyalty program should be assigned measurable goals and KPIs that will help the team evaluate if it brings the desired results. A customer loyalty program is not only about future benefits. It costs a lot and launching one just to have one is pointless. You should start by answering a simple question: what do you expect from it? Are you able to quantify it? Which area, segment or product will it be connected to?
Once you have launched it, it is important to collect data and analyze the program's performance from the very beginning. Check our helpful calculators. Since the loyalty program data is hard sales data, it can be easily measured. The ROI (Return of Investment) is a good indicator of the success and effectiveness of our marketing activities.
How to calculate your loyalty program ROI? Here is a basic formula:
However, if you want to pull more information from your loyalty data, I have prepared some tips you may find useful.
Step 1: Select the right data points
Remember that your analysis is as good as the data you've collected. This is why it is so important to set the right data points. What's the time frame you should analyze? Were there any major changes during this period? If yes, it may impact your results.
What other factors are important for your report? Are you going to analyze the global data, or would you rather focus on the selected area? If you decide to check how your loyalty program performs worldwide, then be prepared to analyze data in various dimensions, because some areas may not be comparable.
That's not all. The most important question is what kind of changes in your customers' behavior should you examine first? This should be connected to your program's main strategy and the reason why it was launched in the first place. Once you set the boundary conditions and data sources, it's time to collect the numbers. What kind of input is needed to proceed with further calculations of complex loyalty program ROI?
- Number of loyalty program members and non-members at the beginning and at the end of a selected period.
- Average customer acquisition costs.
- Purchase frequency of new and existing customers.
- Marketing costs associated with the program.
- Average order value.
- Cost of loyalty rewards.
Step 2: Calculate the loyalty program's cost
Let's begin with the loyalty program costs – how much do you pay for customer loyalty? It's not so easy to evaluate. There are initial costs, such as the work of developers, loyalty program software subscription, or the marketing team work in the launch phase. They may be important for break even point calculation.
Other costs are related to customer acquisition and tell you how much you have to spend to make people decide to join your loyalty program. Those are all the costs of advertisement, mailing, and other forms of spreading the word about program benefits. Is there anything you need to onboard a new loyalty program member? Maybe you enable clients to join the program by filling out the form physically in the brick-and-mortar store? Then, the costs of printed forms and pencils are important too.
But when talking about loyalty program costs, the most significant one will be the cost of the rewards. It's something you can adjust and calculating loyalty program ROI serves also to set them up in a correct way to achieve such goals as revenue and loyalty increase.
Step 3: Estimate the incremental revenue change
...or a change in one of your business objectives. As mentioned above, the final result of the calculation may vary, because we can examine an impact on various business areas.
However, today we will focus on revenue increase, which should be an effect of a successful loyalty program investment. How to find out how much revenue the program brought? The easiest approach is to compare the purchases of members and non-members. It's the easiest, but not the best solution, as you don't know how the membership impacted the final decision to buy a product or a service.
A good idea is to conduct surveys and ask the question of how much the benefits of the loyalty program influenced the decision to buy. If 80% of your respondents say "yes", you may use this index to adjust revenue value.
Step 4: Calculate the Loyalty Program ROI
When you know how much your program costs, and how much money or other benefits it brought, it's time to calculate your return on investment.
Put your data into segments and get the final score by dividing incomes (the difference in earnings and expenses), by expenses. It's a good idea to use customer lifetime value as well.
Step 5: Analyze your findings
Always try to look at the big picture of your ROI analysis. What does it tell you? How do customer loyalty and retention influence revenue? Does it make customer acquisition easier? Do all the segments perform in the same way? Maybe some rewards boost customers' spending, but is their value properly balanced?
Once you will be able to dynamically control the conditions of the loyalty program, it will be a great tool to work on customer loyalty and overall business success.
How to optimize your loyalty program strategy?
It may happen that after all the analysis and calculations you find out that the program expenses outweigh its benefits, in other words, the ROI is below zero or it has little impact on your revenue. What now? You may be asking yourself if it makes sense to invest in the loyalty program, or maybe it's better to terminate it and look for other customer loyalty boosters.
Wait, there is still a lot to do, and loyalty programs are really a great thing to glue clients to your brand. Having already collected all the data, it's a great base and opportunity to design the right system your customers will love.
Insights and analysis of loyalty program data
Detailed analyzes of data collected in loyalty programs allow for effective improvement. Thanks to such research, the company is able to collect information on customer loyalty programs and draw conclusions from their loyalty systems. Analyzing and selecting such data will also help to create a loyalty program strategy and improve it so it brings benefits to the company in the long run.
What areas are worth looking at?
- Is the segmentation of the consumer group appropriate?
- Are you able to clearly define the benefits that the program brings?
- Do you communicate about your loyalty program in an effective way?
- Is the process of joining the program simple?
- Which rewards are of the greatest interest?
These are just some examples. You can use the data collected to analyze swarms of loyalty programs in the context of your most important sales goals. Such exercises should be done monthly, or at least quarterly. For instance, check out how fashion brands do their loyalty programs.
Too poor or too rich?
The ROI analysis is also a very valuable tip when it comes to building a rewards catalog. It is a very difficult task because you have to propose rewards that will be attractive to the participants but also will not cost too much.
If you invest a lot in buying your customer loyalty, even if it brings new customers, it can also be unprofitable. On the other hand, if the benefits are too small, you will end up with high implementation costs, but without success in attracting and retaining customers.
Market and customer research are helpful here. Once you know what customers are looking for, you can look for inspiration for great loyalty program ideas and targeted offers.
Other methods to build customer loyalty
What if it turns out that your customers react poorly to changes in the loyalty program, despite the fact it is carefully prepared?
Maybe it is worth looking at other methods of building customer loyalty and rewarding them for regular purchases.
1. Run a referral program
Referral programs are a special category of loyalty programs – for a good word about the brand and recommendation to family or friends, clients receive points or a prize. This is a win-win situation because you pay out the prize when you earn extra money, so it is quite easy to calculate the return on investment.
A great example of a referral program is described here.
2. Offer discounts and special offers
If you constantly offer interesting offers and discounts you will encourage them to visit your store regularly. Looking for some innovative ways to improve your discount strategy? Read our article.
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3. Run a paid membership program
In a paid loyalty program, members agree to pay a recurring membership fee upfront for great benefits they can use immediately and all the time. Fee-based loyalty programs are more likely to have a higher ROI after launch, thanks to more precise planning and operating with better-explored needs and possibilities. Loyalty program ROI is an effect of activities generated by the program, and let’s highlight once again, that paid membership pushes the customer to interact with the brand more often.
4. Increase social media presence
Remember that engagement is the key to loyalty too. Social media can be a powerful tool to drive your loyalty programs and engage customers. It also gives you a lot of information about the brand image and can be a good indicator for appropriate adjustments to your loyalty program, so listen carefully!
5. Collect customer feedback
You do not know how to pamper your customers, how to make the loyalty program profitable? You should go directly to the source! Satisfaction surveys will help you design perfect solutions for your clients.
6. Improve customer experience
Consumers have quick and easy access to stores and price comparison sites where they can choose the best offer. When selecting a brand, customers are guided by the maximization of their own benefits, unless they like a specific brand or product so much that the purchase takes place on an emotional, not a fully rational level. To arrive at this stage, you need to maximize your efforts on fixing the customer experience – from landing on your page to post-purchase and re-engagement campaigns.
Learn more: Loyalty programs UX Guide.
Summary
Building a beneficial relationship with clients is a long-term goal that requires a lot of effort from all business departments. Meeting customer expectations is one challenge, but ensuring a positive ROI from your loyalty campaign is another tough nut to crack. But in the end, your effort is worth it. As proven time and time again, brands with loyal customers experience higher CLVs and AOVs.
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