10 Apr 2024

How to calculate loyalty program ROI

Reza Javanian

Mohammadreza Javanian

Talon.One loyalty expert

Loyalty program ROI

5 minutes to read

The benefits of customer loyalty programs are widely known. They can help brands achieve many different business objectives. This includes increasing sales, improving customer loyalty, and building brand reputation.

It's very easy to get your own loyalty program up and running with the right tools at your disposal. And they’re applicable across a wide range of industries. As well the importance of calculating your campaign ROI is obvious and known to any marketer. Thanks to extensive research on customer loyalty, we now understand the processes at play behind the scenes. However, one aspect of running a loyalty program that many businesses find tricky is how to calculate loyalty program ROI.

In this blog post, we'll highlight the key factors to take into account when determining the ROI of your loyalty program, including:

What is return on investment?

‘Return on investment’ is a pretty simple concept. There are a few different ways to calculate it, but here's one of the easier methods:


As you can see, the calculation is straightforward. However, working out the gains and costs of your loyalty program investment is a bit trickier. Compared to many other promotion techniques, loyalty programs represent a longer-term investment, with less tangible benefits. This makes the assessment and calculation process more complex.

Newsletter image

Stay in the know with monthly Talon.One loyalty & promotion insights

Loyalty program ROI models

Depending on the design framework, there are a variety of ways you can use to measure loyalty program ROI. In his "Loyalty Programs: The Complete Guide (2nd Edition)", Philip Shelper presents five models to calculate loyalty program ROI:

  • Cost-effectiveness model: Developed by Brian Wansink, the model aims to help program operators save money and achieve better results by improving the rewards and their associated costs.

  • Lifecycle management model: The lifecycle management model looks at revenue or gross margin and takes into account the incremental revenue generated from new customer acquisition and existing customer retention.

  • Recency frequency monetary value (RFM) model: This model is suitable for tier-based loyalty programs. It involves categorizing members into various groups based on their spending amount per transaction and transaction frequency, then determining the return on investment (ROI) for each category.

  • Coalition program model: This model calculates billings from third-party partners that offer points to their customers, as well as the revenue generated from points earned, redeemed, and unused.

  • Member lifetime model: This model focuses on the revenue that members generate directly (via purchasing the company’s products and services) as well as indirectly (via points earned and redeemed).


Formula to calculate loyalty program ROI

Measuring the return on investment (ROI) for your loyalty program involves analyzing various factors, such as customer spending, points earned, and redemption rates. The following three-step process helps you calculate the ROI of your loyalty program.

1. Calculating loyalty program returns/revenue

Loyalty programs help brands achieve a number of different business objectives. These include: 

  • Customer loyalty

  • Customer satisfaction

  • Customer retention

  • Sales

  • Brand awareness

Consequently, the best way to measure a loyalty program’s success varies depending on the business objective in question. Nevertheless, all of the objectives above boil down to increasing revenue.

Luckily there are some key metrics that do a good job of representing most loyalty program objectives. Arguably the most useful metric for working out how much value each customer brings to a business is Customer Lifetime Value (CLV).

Calculating customer lifetime value

There are a few different ways to calculate CLV, some much more complex than others. The example below is the simplified method:


To ensure this figure is relevant to your loyalty program, you should only include loyalty program members in the equation. In this case, it would be annual revenue per loyalty program member.

2. Calculating loyalty program costs

Tracking and understanding costs is the other essential part of calculating the overall return on investment for a loyalty program.

These costs can be split into three main categories:

  • Implementation costs

  • Marketing costs

  • Loyalty reward costs

Each of these three overarching categories comprises a number of smaller sub-categories. For example, implementation costs include things like development, design, and loyalty program maintenance.

Then you have the cost of marketing your loyalty program to get customers to sign up. This could be anything from paying for social media advertising to printing leaflets to hand out in your store.

Finally, there’s the cost of the rewards and incentives your brand offers its customers as part of the loyalty program. These rewards can tip the overall balance of the loyalty program in either direction depending on their value.

Development can make up a large part of the overall loyalty program implementation budget. But most of these costs are already covered when using a third-party promotions solution.

Customer acquisition cost (CAC) is another key metric that is often used alongside CLV. In fact, it’s used directly in the CLV equation above. It allows businesses to assess the cost of their investment in marketing initiatives and other business programs in relation to the number of new customers acquired.

Calculating customer acquisition cost

Having an idea of the general value of your customers over the average lifetime of their interaction with your business is essential to working out your loyalty program ROI:


In this case, you'll also want to add the setup costs for your loyalty program (development, maintenance, etc.) to the top half of the equation. The figures for these costs and the number of new customers acquired should both be limited to a specific time period, e.g. a year.

The 'costs' should also be limited to your loyalty program only, as you'll be using the CAC to work out the specific ROI of your loyalty program.

3. Calculating loyalty program ROI

Once you have figures for both your CLV and CAC, you'll have what you need to work out a rough estimation of your loyalty program's inputs and outputs. You just need to enter these numbers into the ROI equation we outlined, substituting CLV for 'Gain from investment' and CAC for 'Cost of investment'.

Because the CLV and CAC have both been calculated as 'per customer' values, your overall loyalty program ROI figure will also technically be 'per customer'. However, because ROI is expressed as a ratio, you'll still get the same end value as you would if you calculated costs and gains from the program as a whole.

There are many different ways to calculate ROI, CLV, CAC, and all other metrics generally associated with loyalty programs. You may find a method that better captures the specific needs of your business or the way it operates, but generally, it's better to start off simple.

The method we've discussed offers a good starting point that should help you figure out whether your loyalty program is adding value to your business or simply acting as an unnecessary expense.

Check out our latest report, The business impact of Talon.One, to discover an ROI framework for your loyalty program based on real-life examples.

Monthly loyalty newsletter

Join thousands of marketers and developers getting the latest loyalty & promotion insights from Talon.One. Every month, you’ll receive:


Loyalty and promotion tips


Industry insights from leading brands


Case studies and best practises

Newsletter author

Isabelle Watson

Loyalty & promotion expert at Talon.One

Talon.One Logo

The World's Most Powerful Promotion Engine


Wiener Strasse 10
10999 Berlin


41 Church Street
B3 2RT Birmingham
United Kingdom


One Boston Place, Suite 2600
02108 Boston, MA
United States


1 Scotts Road, #21-10 Shaw Centre
228208 Singapore

G2 LogoMach Alliance LogoISO 27001 Logo

© 2024 Talon.One GmbH. All rights reserved.