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Why does loyalty program ROI remain so murky?
According to LoyaltyOne’s “Loyalty Big Picture” report, marketers are increasingly looking at loyalty programs “through an opportunity cost lens” in order to maximize spend. Finding trustworthy ROI, however remains complex.
One challenge is the time period. “By their nature, loyalty programs are long-term and many have been in place for many years which makes measuring the current and incremental impact difficult,” said Brian Ross, president of Precima, in the report.
Many best-in-class loyalty programs also involve a number of components, including multiple-tiers, free versus fee-based programs, personalized to promotional mass offers, in-store marketing and a variety of monetary and experiential rewards.
Marketers need to take into account what the competition is doing, seasonality and weather, as well as all of the other price and promotional activities underway at the company.
“In many companies, loyalty programs are integrated into customer strategies — which make it tough to isolate specific loyalty program results for measurement when it’s part of the core value proposition,” according to the report. “It would be hard to carve Amazon Prime out of Amazon, or SkyMiles out of Delta.”
The report finds loyalty programs continue to see increased investment as members, on average, contribute almost half (43 percent) of companies’ annual sales and spend double to triple non-members. Loyalty data is also being used well beyond marketing and PR departments.
Companies were found to be spending a minimum of two percent of sales on their loyalty proposition, with at least another two percent going to related personalized marketing. Costs are expected to rise as customers seek more digital components, real-time offers and redemption as well as seamless cross-channel interactions.
Suggestions in the report for measuring ROI include determining measurable business goals (i.e., customer acquisition, retention, growing basket sizes), combining data sets and setting metrics.
The two top metrics were found to be membership growth and active members. The report found that loyalty program operators often overlook what drivers are delivering incremental spend and visits. “The real measure of customer engagement is not customer satisfaction, it’s program activation,” according to the report.
Discussion Questions
DISCUSSION QUESTIONS: What suggestions would you have for measuring the ROI of loyalty efforts? Which metrics do you think are most valuable?
Poll
BrainTrust
Joanna Rutter
Marketing, Dor
Cate Trotter
Head of Trends, Insider Trends
Metrics aside, loyalty programs are an outstanding vehicle to ignite customer engagement with your brand. The activation should not be the single most important metric for retailers. Yes there are incentives to drive new loyalty members, but that simply doesn’t impact the bottom line.
It’s the stimulated customer engagement which will drive increased conversions, incremental sales at full price, purchases of complimentary items, and overall revenue increases across channels. There have to be mechanisms in place to not only measure these, but companies have to take the necessary actions to build and evolve a robust loyalty program.
Both Starbucks and CVS have done an outstanding job of engaging their customers, gameifying the shopping experience, and being transparent with their customers with their rewards. Perhaps there are a few too many emails, yet it helps to keep the brands at the top of your mind.
Every great idea or program has its time. Many of the loyalty programs over the years have been successful because, during their time, they were unique and attracted customers to participate in the program. However, today there are so many offers, so many plans and so many opportunities that it gets confusing. I don’t think ROI is the answer. I think it’s going to take marketers using something too many have not for years, “creativity.” There is so much “sameness” today that the customer sees the many brands and retailers as nothing different. Proof of that is to walk a mall and play the game that if the sign outside the retail store was missing could you tell who they are? Unfortunately, today the trend is spending money on technology rather than personnel, investing in gimmicks rather than the product and, worst of all, instead of attracting customers with appealing marketing and clever ads, tryinf to solve the problem with technology. I really don’t think so.
There are many variables in a day-to-day retail business to isolate the loyalty factor. One way a retailer can measure the ROI of a loyalty program is to add the costs of maintaining a loyalty program – including special events and perquisites offered – and then compare the average profit generated by loyalty customers to the average profit generated by non-members over a sufficiently long period of time.
I really like that recommendation, Bob!
The tough thing about spending 2 percent to 4 percent on “loyalty programs” is that it’s still a drop in the organizational bucket, compared to newcomer/challenger brands whose whole model is (philosophically) 100 percent toward the idea of attracting and retaining customers, often at high cost. Loyalty programs are operational structures put on top of something worth being loyal to in the first place. Paying attention to the right metrics may clarify where you’re missing the mark. Look to the ones DTC brands use — cost per acquisition, especially in remarketing; store and website traffic and the CTR of that traffic — and track them in dashboards every day as religiously as they are. Hopefully a good start.
“Loyalty programs are operational structures put on top of something worth being loyal to in the first place.” may be the most brilliant insight we see all day, Joanna. Until retailers have a response to the latter part of the statement, there is no point working on the first part. We are persistent in putting cart before horse.
There are some clear cut leaders in the loyalty game and retailers should look to them to learn best practices. The beauty guys, Ulta and Sephora, are generating a vast majority of their sales from loyalty program members – look at what they’re doing. Loyalty programs in this day and age should be less about giving away margin and more about creating value and experiences for their customers. Loyal customers are willing to provide their data for a more personalized experience – leverage that and use that as a metric.
First, don’t confuse a loyalty program with a marketing program. Loyalty is emotional and brings people back because they love everything (or most everything) about the company they do business with. A program is about getting the customer to come back. But would they come back without the program? I’m not suggesting anything is wrong with a marketing/loyalty program. Just know it is what it is. Without the points – or a free sandwich after buying five – you may not get the customer to come back. So recognizing a percentage of your marketing budget for a loyalty program is a good thing if it’s working.
There are many metrics to consider, but a loyalty program should see two opportunities to grow: retention and average sale/customer.
I agree 100 percent! True customer loyalty is derived from the total customer experience, not just discounts and freebies packaged in a “loyalty program.”
I agree with both you and Shep, Lauren…though I’d go a step further. True loyalty exists only in the absence of discounts and freebies.
The keys to a good loyalty program are that it is relevant to the customer and it is simple to understand. There are so many programs out there that are so complicated you need an advanced degree to navigate! And not just for the customer, but for the associates. If they can’t concisely describe the program, there is no chance that it will do anything for the business. When done right, a loyalty program can do wonders for the brand and business.
As someone who has run a national retail loyalty program, the majority of the stats mentioned in this article are spot on. One I would add would be that loyalty members tend to shop multi-channel and across categories (compared to non-loyalty customers).
The metrics we determined were the most impactful were sales/member (either through increased baskets or visits), retention, participation (also known as usage) and acquisition. There is no doubt that loyalty programs are a significant investment and that some people believe that you are simply giving discounts to customers that would have shopped you anyway. From looking at the data every which way, I believe the ability to identify your customers and provide personalized, relevant content and offers to get repeat visits is worth the expense.
The top metrics influencing the outcomes of a loyalty financial model are membership penetration and growth rate, activity and participation rates, currency funding rates, assumptions for lift/shift/retention, and the member “earning velocity.”
With loyalty programs operating for many years across most brands, establishing a control group in the context of direct marketing is not easy or practical. Some compare the ongoing growth of customer lifetime value between member groups and non-members. Refining this concept, others look at the performance of specific cohort groups pre- and post-enrollment. Amazon reports on its Prime program with this second metric and has established a correlation between member growth and contribution to earnings per share.
There is a fundamental structure that exists, which if followed and consistently measured will lead to reliable loyalty program ROI measurement. Not enough brands understand the full planning methodology and invest in making it part of their customer marketing administration.
Because of the self-selection nature of a loyalty program, we have never been able to measure ROI by looking at value differences between members and non-members. Control groups and looking at the performance difference pre- and post-enrollment cohorts (i.e. Amazon) is valid, but unfortunately impractical for many (most?) retailers.
We have found valid ROI measurements of reward redemption in creating incremental visits and increased lifetime value (profits). Customer churn and margin metrics can also be attributed to the program. Softer metrics like engagement and attitudinal feedback help as well.
Definitely agree that the understanding the measurement parameters prior to launch, developing a logical ROI pro forma, creating the infrastructure, and consistently following it is the right approach.
I agree that growth and retention are usually the primary goals, but today more than ever data acquisition is vying for a top spot. And if your loyalty team is not set up to nimbly leverage the data you are acquiring, you need to rethink its composition.
As for the most valuable metrics, results from the 2019 Maritz/Wise Marketer Loyalty Study found that when consumers were in a brand’s loyalty program 82 percent are more likely to purchase more frequently, 69 percent are more likely to read/respond to communications, and 52 percent say the chance to earn influences them to flip a mental switch and actually ignore offers from competitive brands.
In short – frequency, engagement, and insulation. Those are major pieces you should be looking to achieve and measure from your loyalty program.
And understand that not everything is going to be measurable – that is OK. Aspects of the program that occur further down the funnel like calculating the cost per point issued in a credit card program will have a very clear line of sight into the ROI, but aspects that occur on the outer rings like a continual social media presence might not have as direct of a correlation. In the long run, it’s often those that can’t be measured in dollars and cents that lead to a more emotional and lasting (some would even say loyal) relationship between consumers and brands.
The reason “loyalty ROI” is so murky is that you are not measuring loyalty! This is like measuring base hits while watching a basketball game.
As has been said over and over in this space, the loyalty battle was lost and abandoned decades ago. There is no such thing in current retail reality. What retail is trying to measure is OPPORTUNISM. Shoppers will drop you like a hot rock if another store saves them a mere 5 percent or 10 percent more than you offered. Every time sales promotions show up in junk mail, shoppers look for the best opportunities. They are not thinking about being loyal to anyone other than themselves.
The wicked question that needs to be asked is this? “What is there to be loyal to in any given retail circumstance?” Loyalty is a social or even a spiritual decision, NOT a mechanistic one. You can’t measure love on a spreadsheet!
I agree with you that “Loyalty” in its broadest sense is something people reserve for their higher power, country and family. I use the word as a way to address all forms of “data-driven customer marketing,” in large part because we’ve never come up with a term that is a better descriptor. CRM, Customer Engagement, Customer Experience, Digital Marketing and many others have all been suggested but each contributes to confusion over meaning in its own way.
The purpose of this part of the marketing discipline is to improve customer lifetime value across specific groups in a customer portfolio. No one I know thinks they can generate mindless, unwavering loyalty to a brand. People are fickle and unpredictable as you mention.
To me, this is a valid conversation as long as we can agree on the meaning of the terms we are using to address the topic. Make sense?
Yup though it’s in the definition of those terms that things get messed up. And you hit the bullseye by suggesting that what is really being measured is “customer value. ” Loyalty is a quality attributed to a customer while “customer value” is purely from the retailer’s perspective.
Net promoter score has got to be a candidate metric.
Direct marketers know we shouldn’t test whispers. Yet retailers are testing whispers constantly in their loyalty programs. How? They test things which can, at best, create only small change.
Loyalty impact may also be murky because, based on excellent research across categories, it’s not a very efficient use of money.
Why does EVERYONE believe they are effective? I suppose it seems so “common sense”. Except it’s not. Marketers end up paying double for basket size — paying twice for what we only needed to pay for once. And more data won’t clarify things.
Loyalty programs probably can’t be cancelled. But they certainly shouldn’t be seen as positively as they are.
For mature programs I seriously doubt most program managers actually examine their original business case and associated assumptions for the financial model to confirm and/or deny assumptions made. Likewise, I seriously doubt that the owner of the program sitting in CRM or Loyalty or Customer Experience wants the CFO or Finance team auditing their program metrics. The investment in the program MUST be supported by ongoing examination of assumptions and proof points. Over time, pre vs. post launch comparisons to support incremental lift projections loses its validity – too much time has passed, competitive environment changes. We all recognize that the program is a stimulus. Loyalty leadership must have a precise method to understand incremental lift and that comes from seeing:
See my article for more.
In order to get a handle on loyalty program ROI, you need to lower your reliance on promotional marketing spend. Just pouring money into the program by no means ensures better performance. You can also help drive loyalty by increasing the breadth of category penetration throughout your assortment. Get customers entrenched in your brand, thoroughly. Finally, loyalty tiers are still critical to define, and they should be synced to your audience segments in order to provide maximum flexibility for your reward systems as the market evolves. Consumer tastes change and you need to be agile in your segments to move quickly as the market demands.
Anything that stays the same too long becomes stagnant, and that’s exactly what happens with a lot of loyalty programs. They can become expected, boring and less impactful over time if they’re not continually kept alive and exciting.
The right metrics (basket sizes, lifetime value, customer profitability) give us an opportunity to see what’s really going on, but also to see and create new value for our customers.
Measuring loyalty program effectiveness is complex because it is difficult to truly measure how much it impacts some purchase decisions that would happen even if the retailer didn’t have a loyalty program. On the flip side, in some retail segments it is imperative to have a loyalty program that is on par with your competitors or you will risk losing customers to your competitors.
There are a lot of good measurements to track (cost per acquisition, average order value, repeat purchase rate, revenue per customer, customer profitability, etc.). The best ROI metric depends on your objectives for the loyalty program.
The thing about loyalty is that some of the brands with the most loyal customer bases don’t have a loyalty programme. Or at least not a stamps/points/rewards style arrangement. They’re brands that people naturally want to keep coming back to because they offer something better than what else is out there — be that product, experience, customer care etc.
While loyalty programmes can, and do work really well, retailers need to have their offering straight first. All the points in the world won’t bring someone back if they don’t enjoy shopping with you. Know who you are and what you offer, understand why people choose you, then (if you want to have a loyalty programme) create a scheme that is linked to that. Loyalty is the ROI of getting your retailing right in the first place.
There are a few issues here. One has to do with semantics. Too often what is commonly referred to as a “loyalty” program is a frequency buying program and they’re not the same. As Shep Hyken points out “loyalty” is an emotion and the best program is actually none at all. If your brand is truly remarkable and customers not only seek you out, but concentrated their category spending with you AND are ambassadors for the brand, then you’ve got loyalty and the things you measure are different then simply a frequency program.
In terms of the difficulty of measurement, one challenge is closed loop attribution. In a harmonized shopping world (my term for omnichannel) where most customer journey start in a digital channel, it’s often hard to really understand cause and effect. The other issue is isolating the marketing treatments. There are so many overlapping stimuli and many companies are terrible at setting up appropriate test and controls that there is plenty of faulty analysis in my experience.
Having led the re-design one of the most prominent retail loyalty programs I can tell you that were many beliefs going in that were not only totally wrong, they drove the wrong implications.