The power of consumer loyalty is a powerful success factor. Studies show that as little as a 5 percent increase in customer loyalty can mean up to a 95 percent increase in lifetime spending. Therefore, effective customer loyalty programs require strategy, constant monitoring and persistence. As in a marathon, the key to success is the ability to maintain an even pace. How do you measure the effectiveness of this long-distance business run so that you don’t catch breathlessness and achieve the best results for as long as possible?
Countability – the key to success
In theory, every organizer aims to see the number of participants in a loyalty program grow and the program itself become more and more popular. However, this entails increasing expenses. The better one works with the program and the larger the base of regular customers becomes, the higher will be the cost of communication, or the cost of the promotions implemented. If there are no well-defined ways to measure the benefits of a loyalty program, it may seem that the solution only generates more and more financial needs. Therefore, in order to understand the impact of the loyalty program on the business, it is essential to establish clear and understandable methods for measuring the effectiveness of the activities introduced. This way, at the end of each day, you can show what the results are or, in a worse case, you can understand what the lack of results is due to.
What matters is not just taking measures that are attractive to the consumer, but being able to count them and present the financial effects in a way that is clear and understandable to the entire organization. A loyalty program is an investment, not a cost. Unfortunately, as in preparing for a marathon, the effects are usually not seen overnight. That’s why it’s so important for executives to understand how a loyalty program makes money, and how building long-term relationships with customers translates into financial results for the entire company.
In the pursuit of proving that a loyalty program makes money, there are times when effectiveness is measured in an unreliable manner. A simplistic approach to analysis can lead to incorrect conclusions. So how do you calculate the actual impact of a loyalty program?
Business impact of loyalty program
Without knowledge of the actual results of ongoing activities, managers are doomed to strategies like copying ideas from previous years, reacting to competitors’ actions or simply their own intuition.
In order to effectively evaluate ongoing activities, it is essential to have solid benchmarks that will help understand whether loyalty program participants behave differently (better) than non-club members. One popular method is control groups, which will help the organizer understand how much better results have been achieved.
A control group is a group of customers, similar to those included in the promotion, but excluded from it. With a control group, therefore, it is possible to more accurately assess whether the promotions implemented as part of the program are actually having an impact and producing the desired results in the target group. However, adopting this approach for customer loyalty programs comes with challenges, including how to exclude some customers from your program.
Although evaluation based on control groups is not an ideal method, at this point it seems that a better one has not been found. What needs to be taken care of is representativeness, in order to be able to reliably explain the differences between the control group and the group influenced by the activities carried out. Depending on the type of program and what you want to monitor and how deep you want to go in your analysis, the group size can vary. If the company cares about very detailed segments, it may be that the more customers need to be excluded from the communication in order for the different groups to be representative.
When evaluating the effects of loyalty program campaigns, it is necessary to look not only at the unit increase in sales, but also at other phenomena related to the promotion, such as those that would not have occurred if the promotion had not been in place. This is primarily about the shift in sales over time, or the impact of the promotion of a given product mix on other product categories. It is the interplay between these various effects that determines the overall profitability of the promotions carried out under the loyalty program. Ideally, the company, on the basis of analysis of historical data and predictive models, can accurately estimate the profitability of the activities undertaken even before they start. To achieve this, it is worth choosing to work with an experienced partner who will advise on how to carve out control groups and prepare analyses on the impact of actions on brand profitability.
Persistence and measuring progress
Both a marathon and a loyalty program require persistence to succeed. Results do not appear overnight, and achieving the intended goals requires monitoring progress and optimizing the actions taken. For this, it is necessary to set key indicators (KPIs). So what to measure?
- Purchase response and LTV
The shopping response rate tells the program organizer how much customers respond to the loyalty program’s promotions and offers. A higher response suggests that the program is effective in encouraging more frequent and larger purchases. In turn, the LTV ratio, or customer lifetime value of a relationship with a company, is a key determinant in assessing long-term loyalty building. Loyalty programs that help increase LTV create not only loyal but, importantly for the company, profitable customers.
- Churn and prevention of customer churn
A high churn rate, or level of customer departure from the program, can signal some growing problems. First and foremost, it can mean that the program is not meeting customers’ expectations or not delivering value to them. Measuring the level of deactivation of club members’ accounts is also a valuable source of information about which groups of customers are more likely to leave. Based on this, you can tailor your loyalty program to different customer segments and deliver personalized rewards or offers that better meet the needs of specific groups.
- Satisfaction surveys with the help of Net Promoter Score
To evaluate the effectiveness of the program, an NPS survey can be used, which, in simplest terms, is based on the question: how likely are you to recommend a product or service to a friend? Respondents provide answers on a scale from 0 – definitely not recommend, to 10 – definitely recommend. The customers who are most loyal to your company are referred to as promoters, and their rating is either 9 or 10. This is not just a static indicator – its regular monitoring allows you to track changes in customer perceptions of your brand and adjust your program to increase loyalty.
Club member loyalty can also be measured by the rewards redemption rate. Information on how many customers regularly redeem and receive rewards shows how actively customers participate in the loyalty program. A club member should not only collect points, but also redeem them regularly for rewards. A low redemption rate can signal problems, such as overly complicated participation rules or inappropriate rewards, which are worth eliminating to increase the program’s effectiveness.
The indicators listed are not the only ones worth tracking. Initially, it’s best to focus on the basics, because without adequate security at the start, you can quickly fall out of the race for consumer attention. Depending on the complexity or maturity of the program, it’s worth expanding the list of indicators to include those that you particularly care about improving.
The road to victory
As in a marathon, the real secret to success is the ability to maintain momentum. In the case of a loyalty program, “keeping the momentum” means keeping loyal customers with you for as long as possible. Without proper preparation, monitoring of progress and optimization of actions taken, it will be difficult to achieve the set goals. Measuring detailed loyalty program metrics is not only a control tool, but also an opportunity to increase profitability by better understanding club members’ needs. After all, transparent reporting and proof that the program is making money may determine the company’s decision whether to continue investing in the venture.