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Introduction
Did you know that optimized loyalty programs boost revenue from customers who use them by 15-25% annually?
Loyalty programs are key to creating unique relationships with your customers that will turn them into loyal, lifelong customers. They’re associated with a lot of key metrics including acquisition, retention, growth, CLTV, and more.
Nevertheless, loyalty programs are still considered an expense - and it could get costly according to how you’re choosing to implement your loyalty program.
If you’re not measuring your loyalty program ROI, you could be missing out on some seriously valuable insights on how to optimize your loyalty program and maximize its value.
In this article, we’ll talk about how to calculate loyalty program ROI, key metrics to keep in mind, possible factors impacting your loyalty program, and more.
Importance of Loyalty Programs
With over 90% of companies having a loyalty program, the big question is, do they work? In a loyalty report by Bond, their studies found that 84% of people who were members of a loyalty program made a redemption at some point. Not only that, but 71% of consumers said they found that the loyalty program was a meaningful part of their relationship with the brand. Over time, a loyalty program has a compelling benefit for the brand; on average, around 66% of customers modified spending habits to maximize rewards points, resulting in a 27% increased overall cart total. In another study by Incentive Solutions, they found that the average order quantity before and after the implementation of a loyalty program increased by an astounding 319%!
Read more about it in our blog post “Do Customer Loyalty Programs Really Work?”
Importance of Measuring ROI
ROI, short for Return on Investment, is basically a metric that tells you if you’re getting your money’s worth. It lets you know what’s working and what could be working better, and how effectively you’re managing your budget. If you discover that something isn’t really bringing in the kind of results you’re looking for, you can reallocate funds somewhere better.
Once you begin having a clear understanding of your ROI, you can set measurable and attainable goals to optimize your marketing strategy.
ROI Calculation
Typically, the formula for ROI looks like this:
ROI = (Net Profit / Cost of Investment) x 100
In simpler terms, net profit is what you gained from the investment - in our case a loyalty program. But here comes the tricky part, how do you measure - let alone calculate - everything you gained out of your loyalty program?
Calculating The Benefits of A Loyalty Program
Loyalty programs have endless benefits, the most common ones being increasing customer engagement, customer retention, customer satisfaction, and average order value. Which generally, all fall into increasing revenues for a business.
Instead of measuring each metric alone, our key metric to measuring how much value is coming into a business is “CLTV”, or customer lifetime value.
CLTV (Customer Lifetime Value)
Determines the total revenue a customer generates throughout their relationship with your brand. This metric helps evaluate the profitability and long-term value of customers.
CLTV Formula:
"Customer Lifetime Value = (Annual Revenue per Customer* x Average Customer Lifespan) - Customer Acquisition Cost”
To apply this to your loyalty program, that would mean annual revenue per loyalty program member.
Calculating Loyalty Program Costs
These are divided into three main costs, implementation, marketing, and reward costs.
Implementation includes costs like development, outsourcing, design. Marketing includes promotion and advertising, while reward costs is how much it actually costs the business to reward customers.
The key here is to include all parties involved to determine the true total cost of implementing your loyalty program.
CAC Formula
After determining marketing and reward costs, here is the formula for working out the CAC (Customer Acquisition Cost)
CAC = Implementation, Marketing, and Reward Costs / Number of Customers
Calculating Loyalty Program ROI
After you have your CLTV, which represents the total value out of loyalty program members, and the CAC, which represents the cost of acquiring each loyalty program member, you’re ready to calculate your loyalty program ROI.
Loyalty Program ROI Formula
Loyalty Program ROI = (CLTV/CAC) x 100
Conclusion
Now that you know your loyalty program ROI, you can take strategic decisions on how to optimize your loyalty program for increased revenue and growth. There are so many steps you can take to either increase CLTV or decrease your CAC (both of which will positively affect your loyalty ROI). Here are some of our best recommended tips:
- Lower implementation costs by outsourcing your loyalty program instead of building it in-house.
- Focus on personalizing experiences for customers rather than a one-size fits all experience.
- Expand Average Basket Size per customer
Further Reading: Customer Retention Rate
Customer Retention Rate
Customer retention is what companies, startups, businesses, large and small, work on to increase their customers and ensure that current customers are coming back.
In other words, it's a tactic to help businesses generate consistent revenue from a pool of existing and returning customers.
Customer retention normally begins when a customer first enters your store, whether online or offline. Your company then wants this customer to keep coming back.
Plus, customer retention is affected by the number of new customers your business can acquire and how many existing customers leave, stop buying from you, or stop using your service.
That's why the best way to measure customer retention is by calculating the customer retention rate.
This method requires three things:
- Period of time: weekly, monthly, quarterly, annually
- Number of customers at the end of the time period
- Customer acquired during that period
Here's what the formula looks like:
Customer Retention Rate Formula =
( (# Customers at End of Period - # Customers Acquired During Period) / # Customers at Start of Period) ) X 100
Let's use the formula in an example to make it clearer.
Let's say your online store starts January with 20 customers, and you get five new customers every month, while one customer leaves your store also per month. The latter is called churn.
By using these numbers in the formula, it looks like:
( (24 - 5) / 20 ) ) x 100 = 95% retention
Let's broaden the numbers a bit. Let's say your store starts with 50 customers, you gain 12 customers per quarter but lose 15.
( (47-12) /50 ) x 100 = 70% retention
Once you know your average customer retention rate, you should look at your churned customers and see why they leave.
Read more: Customer Retention 101: How To Create Loyal Customers
Retaining your customers is also a fool-proof way to boost CLTV and decrease CAC - so overall your retention rate is a key element in boosting your loyalty ROI.
If you want to start implementing a loyalty program that promises a mega-high ROI today, sign up for Gameball today or book a call with one of our loyalty experts to find out more.
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