Editor’s note: This article was co-written by DEG Analytics & Insight Team Lead Samantha Petrovic.

Rethinking the Rules of Loyalty

If you’re considering launching a loyalty program or refining your existing program, you should consider what data metrics with which to measure your program’s success. We know, there’s a lot of data you can sift through about your current customers and/or loyalty program members.

That’s why we’ve put together a list of questions you should ask yourself as you evaluate how to measure your program. Just remember—loyalty should be an equilibrium.

1. Why do we need a baseline?

You need a baseline to know what to compare your performance against. A baseline will allow you to measure incremental lift from program launch or relaunch.

2. What are examples of baselines we can use?

You can use your current state projected going forward. That includes using loyalty vs. non-loyalty members, and we can use historical data prior to launch or relaunch.

3. What are baseline metrics we should be looking at?

A few examples of baseline metrics are:

  • Average order value (AOV)
  • Member vs. nonmember
  • Existing members
  • Participation rate (e.g. engagement rate, but specifically for loyalty program measurement)
  • Amount of active members
  • Amount of offers redeemed
  • Amount of inactive members
  • Current member attributed revenue
  • Program cost
  • Customer lifetime value (CLV)

4. What should we use as our baseline?

It depends. There are pros and cons to all baseline options. And it’s often difficult to obtain data for pre-post analysis and can be extra difficult to gain access to individual customer data from non-loyalty members.

In addition, baselines can be vulnerable to self-selection bias when comparing against non-member data. Projections can be inaccurate and not account for exogenous factors.

We recommend taking this information into consideration and comparing the outputs of these proposed solutions to see what works best for your loyalty program and the goals your program is working to exceed. For example, if you have an existing loyalty program that is based on punch cards, but you relaunch with a points-based system, historical data is probably not the best baseline metric. Rather, that data could be references to inform other aspects of your new loyalty program.

5. What is motivating people to participate in a loyalty program, let alone share their preferences and behaviors with a company?

Free stuff! Loyalty programs are transactional by nature. They incentivize people to provide their data—preferences and behavior patterns—and evangelize to their friends in exchange for various perks like rewards, exclusive experiences, or improved personalization.

6. What is participation rate and what should the ideal number be?

The ROI of Loyalty Engagement ebook

Participation rate is the number of total customers who participate in a loyalty program. Once mature, participation rate should be steady as loyalty program membership keeps pace with overall growth in customer base.

7. How does participation rate relate to accounting?

Higher participation rates can lead to higher reward liability. Breakage rates should be stable once the loyalty program is mature, as increasing numbers indicate too much is being given away and decreasing numbers indicate loyalty program activity is decreasing.

8. How do we measure the financial value of individuals?

Customer lifetime value. The primary purpose of a loyalty program is to increase the CLV of loyalty members. This can be through incremental visits, increased average transaction values, and increased transaction cadence.

The behavioral success of a loyalty program can be estimated through the change in CLV of a given cohort over a period of time. One aspect of CLV that is often neglected is the propensity of a customer to bring in another customer. Although not directly financial, this ties to the behavioral changes elicited by a loyalty program.

9. How do we estimate optimal rewards?

Economics tell us profit maximization occurs when marginal profit is equal to marginal cost. In a loyalty program, this occurs when the marginal incremental value generated by a reward minus the cost of the reward is equal to zero.

However, this neglects the behavioral aspects associated with rewards. Some people may have higher marginal incremental values from different varieties of rewards, points, etc. Timing of rewards also plays a role in determining the marginal incremental value. To know what rewards work best for your program, conduct an A/B test of the rewards you offer.

10. What is customer retention?

Customer retention is increasing the expected lifespan of any given customer. Loyalty programs are expected to grow customer retention through the increased cost of switching to a competitor. Increasing switching costs is crucial in an industry with many substitute goods, such as the restaurant industry.

11. How do loyalty programs increase customer-switching costs?

Incentivize customers to concentrate substitute purchases to one company (yours) in order to obtain rewards more quickly. This is called operant conditioning.

12. How do we measure customer retention?

Companies can measure customer retention by looking at the customer churn rate or customer lifespan. Churn rate can be measured indirectly through reward redemptions and breakage.

13. What else can be measured?

You should consider also looking at metrics like sentiment analysis and brand affinity. Softer metrics can be used to measure the feelings of existing members, new members, and nonmembers to identify insights that drive actionable change in how a program performs with relation to the customer at any stage in the relationship.

Balancing your loyalty program

Top 5 Tips for a Successful Loyalty Program

Like many things in this world, a successful loyalty program should be balanced. A mature loyalty program should not be prone to large bouts of volatility. It should be like a rafter on a stream, carried by the currents of growth, slowly and steadily correcting course when finding itself listing toward an underwater hazard.

Ultimately, a loyalty program should increase its value through the steady modification of customer behavior.

For more information about getting the most ROI out of your loyalty program, check out our free loyalty ebook.

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