While customer loyalty programmes are commonplace, evidence indicates that not all schemes are delivering return on investment. With loyalty programmes potentially very expensive initiatives to run, they can easily haemorrhage cash. And according to McKinsey, a great number of businesses across several sectors are actually losing money hand over first due to their reward schemes.
David Edelman, McKinsey partner leading digital marketing strategy practice, recently noted: “McKinsey research showed that those companies that spend more on loyalty, or have more visible loyalty programs, than their peers grow at about the same rate – or slightly slower – than those that do not. In addition, companies surveyed that had higher loyalty spend also had EBITDA margins that were about 10%lower than companies in the same sectors that spent less on loyalty.”
In light of this, it is absolutely vital that organisations monitor their loyalty programmes in an effort to track return on investment, not only to keep tabs on the benefits and efficiency of the programme, but also to ensure that it isn’t dragging you into the red.
However, measuring the impact of your loyalty programme is not necessarily straightforward, particularly if you are deploying multiple reward systems such as game platforms, vouchers and loyalty cards. There is no magic number that you can monitor to tell you precisely how well the programme is performing, and organisations therefore need to measure a range of figures.
“All loyalty programmes are not alike, and measurements of success may vary from programme to programme and strategy to strategy,” says Dennis Armbruster, editor-at-large at COLLOQUY and LoyaltyOne Consulting managing partner. “One may even argue that ROI is the wrong metric to focus on.
“Many organisations take a more balanced approach when assessing the relative health and success of their loyalty strategies. Financial metrics are lagging indicators of success and often-times lead to decisions that may or may not result in timely and effective changes in programme execution and eventual financial success. Understanding objectives at a financial, customer and operational level may assist organisations in their quest to deliver timely and relevant changes that drive return on investment.”
In addition to monitoring performance against pre-determined objectives set out during the strategic planning stage, there are a range of other general metrics that can give your organisation a broader picture.
“As with any initiative you implement, there needs to be a way to measure your marketing. Put in place multiple metrics with the over-riding aim that customer loyalty programmes should increase customer happiness and retention,” says Daniel Bausor, managing director at customer advocacy consultancy, Famous4 Communications. He suggests that it is good housekeeping to keep track of the following metrics:
- Customer retention rate. This metric indicates how long customers stay with you. “With a successful loyalty programme, this number should increase over time as the number of loyalty programme members grows,” adds Bausor. “Fred Reichheld, author of ‘The Loyalty Effect’, says that a 5% increase in customer retention can lead to a 25-100% increase in profit for your organisation.”
- Negative churn. Churn is the rate at which customers leave your organisation; so negative churn measures customers who don’t for example, upgrade, or buy additional services. “These help to offset the natural churn that goes on in most organisations,” says Bausor. “Depending on the nature of your organisation and loyalty programme, this is an important metric.”
- Net Promoter Score. A customer satisfaction metric that measures the degree to which customers would recommend the company to others, this measure is highly regarded by many large brands. “Improving your Net Promoter Score is one way to establish benchmarks, measure customer loyalty over time, and calculate the effects of your loyalty programme,” explains Bausor. “A high NPS score is over 70% which can be facilitated through an effective loyalty programme.”
- Customer Effort Score. This asks customers "How much effort did you personally have to put forth to solve a problem with the company?" This metric is proving more popular than NPS in some quarters because it measures actual experience rather than the emotional delight of the customer. Bausor adds: “A recent study by the Harvard Business Review found that half of customers who had negative experiences with a company told 10 or more people. In this way, customer service impacts both customer acquisition and retention. If your loyalty programme addresses customer service issues, like expedited requests or free shipping, this could be one way to measure its success.”
Customer lifetime value modelling
When it comes to more specific programme-related performance measures, Richard Madden, chief strategy officer of Kitcatt Nohr, recommends a system that he has himself used in the past when Marks & Spencer wanted to estimate how its new And More programme would perform.
“Marks & Spencer piloted the programme in some local areas, one in Wales and one in the South East. We partnered those stores with similar stores with a very similar catchment elsewhere that weren’t running the scheme. And M&S was able to demonstrate to its very financially-driven board that there was demonstrable benefit from introducing the programme.”
He adds: “Another thing you can do without going to piloting and without doing complicated econometrics, is to look at a year-on-year comparison. Look at your performance with the loyalty programme in year two compared to without the loyalty programme in year one. And this untangles the other factors like the weather and the economy and so forth. But I would always prefer a control-based side-by-side comparison like the M&S example than something where you have to go to the board and convince them with econometrics.”
A further option is to conduct some basic customer lifetime value modelling, which can give you a picture of performance.
Tim Keiningham, global chief strategy officer and EVP at Ipsos Loyalty, and author of Why Loyalty Matters, explains: “You don’t have to look at their entire lifetime, just the near term, perhaps three years. You can make a projection of what the customer should be spending with you if you did nothing, because you’re collecting every bit of data about them. But you can also see what happens when you do a marketing intervention to see how that impacts their spend with you, both in the short-term and the long-term and you can get an individual level ROI that you roll up.
“What is so nice about these programmes is that you care collecting so much data, so as long as you are modelling it properly, you can do this measurement. And right now there are a ton of books out there that are quite good about doing standard CLV modelling, so it’s not rocket science anymore.”
By using some or all of the measures above, your organisation is therefore able to get a clear picture about how your loyalty programme is performing or will perform. And with so many programmes losing money, this could save your business from making a costly mistake.
Keiningham concludes: “The biggest issue is just making sure you don’t design a stupid marketing programme – because people do it all the time. The ‘I’m going to lose a dollar on this but I’ll make it up on volume’ stuff just doesn’t work. You have to make sure that you’re offering something that is attractive enough to get people to buy, but isn’t a money-losing delighter. That is the part that kills businesses. So you have to be smart about what the actual cost is, and what the expected return is on it.”
About Neil Davey
Neil Davey is the managing editor of MyCustomer. An experienced business journalist and editor, Neil has worked on a variety of newspapers, magazines and websites over the past 15 years, including Internet Works, CXO magazine and Business Management. He joined Sift Media in 2007.