Understanding how Customer Loyalty Programs Affect the Bottom Line

There is a reason that so many companies are implementing customer loyalty programs. They offer quantifiable advantages. In other words…they work! They drive repeat business, often from the company’s most profitable customers. Loyalty programs create advocacy and word-of-mouth advertising. Advocacy decreases acquisition costs and exponentially multiplies marketing efforts.

These programs also provide invaluable data. This data helps companies better understand purchasing patterns, preferences and customer behavior. This understanding aids in developing marketing messages, deciding stock and forecasting sales.

How to Calculate The ROI of a Customer Loyalty Program

The Return on Investment (ROI) of a Customer Loyalty Program can vary widely depending on the specific program, industry and how effectively the program is implemented and managed. Calculating the exact ROI for a loyalty program is a complex process involving measuring the costs and benefits associated with the program.

Here’s a simplified overview of how to approach ROI calculation for a loyalty program:

ROI = (Net Gain from Loyalty Program – Cost of Loyalty Program) / Cost of Loyalty Program

Here’s an example in terms of a simple campaign. Let’s say you ran a campaign that made a net gain (after direct expenses) of $75,000 and that running the campaign cost $27,500:

ROI = ($75,000 – $27,500) / $27,500 = $47,500 / $27,500 = 1.72 = 172% ROI

Here’s a breakdown of what each part of the formula means.

Net Gain from Loyalty Program

This represents the incremental revenue and profit generated from the loyalty program. It includes:

• Increased sales from loyal customers
• Reduced customer churn (i.e., fewer customers leaving)
• Higher average transaction values from members
• Additional purchases or cross-selling
• Cost savings from marketing to existing customers

Cost of Loyalty Program

This includes all expenses associated with planning, implementing and managing the loyalty program, such as:

• Technology and software costs for program management
• Rewards and incentives given to customers
• Marketing and promotional expenses related to the program
• Administrative and operational costs

To evaluate the ROI of a loyalty program effectively, consider these additional factors:

• Customer Lifetime Value (LTV)
  • Understanding the incremental LTV of loyalty program members compared to similar customers not in the program is important, but not often feasible. This metric accounts for the long-term value of a customer and helps assess the program’s impact on customer retention and spending over time. Unfortunately, comparing program members to non-members introduces selection bias, and the incremental LTV is anywhere between 0% and 100% of the observed difference.
• Segmentation
  • Analyzing the performance of different customer segments within the loyalty program can provide insights into which segments are most profitable and where adjustments may be needed.
• Customer Acquisition Costs (CAC)
  • Consider how the program affects CAC. If the program reduces the need for expensive customer acquisition efforts, it can positively impact ROI.
• Capital Expenditures
  • Most customer loyalty programs have meaningful up-front costs for design, development and implementation. These can include:
    • Consulting for strategy and design services (which is what Ascendant Loyalty marketing provides!)
    • Technology development, such as loyalty software platform setup, integration with existing systems, a mobile app and website development

High ROI Case Study: Lululemon Athletic Wear

A successful example of a program that provides incremental value to its customers and ROI for the brand is Lululemon’s “The Sweat Collective.” This loyalty program is for fitness professionals and enthusiasts. Here’s how it provides incremental value:

1. Discounts and Exclusive Access: Members of “The Sweat Collective” receive a discount on Lululemon products, both in store and online. This exclusive pricing provides direct monetary value to program members.
2. Access to Events and Workshops: Lululemon hosts various fitness and wellness events, workshops and classes. Members have access to these events, which can include yoga classes, meditation sessions and fitness workshops.
3. Networking and Community: The program encourages community among fitness professionals and enthusiasts. Members can connect with like-minded individuals and professionals in the fitness industry, generating networking opportunities and community building.
4. Product Testing and Feedback: Lululemon occasionally invites members to provide feedback on new product designs and innovations. This allows members to influence product development and be among the first to try new items.
5. Early Access to New Collections: Members often have early access to Lululemon’s latest collections, allowing them to purchase highly sought-after items before the general public.
6. Sustainability Initiatives: Lululemon is committed to sustainability and members of “The Sweat Collective” may be invited to participate in events and initiatives focused on environmental and social responsibility.
7. Support for Fitness Professionals: For fitness professionals, the program offers additional support and recognition. This can include opportunities for collaborations, promotion and exposure within the fitness industry.

“The Sweat Collective” by Lululemon not only enhances the shopping experience but also creates a sense of belonging and connection among fitness enthusiasts and professionals [2].

A well-crafted customer loyalty program can be a profitable investment for businesses. Designing an effective program requires a meticulous blend of strategy, creativity and customer understanding to deliver true value and build long-lasting customer relationships.

Innovative Techniques for Boosting Customer Retention

Customer loyalty programs require regular evaluation for maximum effectiveness. Continuously measuring their return on investment (ROI) ensures they deliver profitable business results. Tracking ROI is crucial in determining the economic benefits derived from such programs.

We urge marketers to prioritize several key performance indicators. These include:

• Purchase frequency
• Average order value
• Customer referrals

These three indicators provide clear metrics for the ROI of loyalty programs.

We suggest adopting customer retention strategies such as gamification, personalized offers and rewards points. These strategies, in conjunction with ROI tracking, will enhance the value of your customer loyalty programs.

Measuring the Impact of Customer Loyalty Program on ROI

Customer loyalty programs will affect a company’s return on investment (ROI). How well it’s executed impacts if that’s positive or negative. A well-managed loyalty program can increase customer retention, driving consistent revenue growth.

Conversely, poor handling of a loyalty program can negatively impact ROI. Frequent changes, complex programs and rewards that seem impossible to redeem will cause dissatisfaction with your customers. This can lead to decreased loyalty and decreased overall sales. The Harvard Business Journal quotes:

“eBay quietly pulled the plug on its Anything Points program for U.S. customers. Target missed the mark, with its innovative approach involving “smart” credit cards. American Airlines and America Online jettisoned their joint customer-loyalty program. The list goes on” [1].

Optimizing a loyalty program’s impact on ROI involves continuous measurement and improvement. Tracking metrics such as customer churn rate, repeat purchase rate and customer lifetime value will disclose valuable insights for ensuring its positive impact on ROI.

Things to Avoid When Implementing Your Customer Loyalty Program

Misalignment of rewards with customer preferences can jeopardize your customer loyalty initiative. Be sure you understand what is valuable for members or they will quickly lose interest, putting the program at risk.

A lack of clear communication also poses a threat to the ROI of your program. Without sufficient information, customers may not understand the program’s benefits, reducing participation rates and potential ROI. Not utilizing customer data accurately may lead to irrelevant reward offerings, causing customer disinterest. Building a data insights team that can spot trends from your customer engagement data ensures that negative trends are observed and resolved before they become problematic.

Summary: The Business Value of Effective Customer Loyalty Programs

Calculating return on investment (ROI) is an integral part of loyalty program impact analysis. While there may be many variables, considering the most quantitative and high-value income and expenditure will help to understand the ROI of a given campaign.

Failure to implement a customer loyalty program can be a missed opportunity, but failure to understand its impact can be just as bad for business. Contact us today if you need help strategizing or determining the potential value of your customer loyalty program.

[1] Your Loyalty Program Is Betraying You by Joseph C. Nunes and Xavier Drèze – https://hbr.org/2006/04/your-loyalty-program-is-betraying-you

[2] Source: “How Lululemon became one of the biggest risers in the BrandZ Top 100” https://econsultancy.com/how-lululemon-became-one-of-the-biggest-risers-in-the-brandz-top-100/