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.
Thanks to extensive research around customer loyalty, we now understand the processes at play behind the scenes. But one aspect of running a loyalty program that many businesses find tricky is how to calculate loyalty program ROI.
‘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.
Loyalty programs help brands achieve a number of different business objectives. These include:
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).
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.
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:
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.
Having an idea of the general value of your customers over the average lifetime of their interaction with your business is essential to work 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.
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.
To find out more about all sorts of promotions and how they could help your business, check out some of the downloadable content in our Content Library.
Get the most out of your reward programs
To work out the ROI of your loyalty program, you need to be able to work out the gains and costs associated with it. Two metrics that can help are:
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