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Four Ways a Loyalty Program Contributes Incremental Financial Benefit
Alex Tavera
As a loyalty expert and multiple time owner of a point-based program, I am often asked if loyalty actually drives incremental financial benefit to an organization. Skeptics believe that loyalty programs are a table stakes requirement of a company these days and only serve to create buzz. They do not trust that these programs drive incremental revenue and ultimately believe they are a financial drain. One such suspicious executive went as far as to tell me, “these programs are a façade, and by façade, I mean a sham.” Over the course of our work together, however, I was able to prove financial success and convert him into a loyalty believer by using four different measurements of incremental financial contribution. I will share those with you below.
Before getting into metrics, it is worth noting that I understand why these above-named loyalty skeptics exist. When a company does pull the loyalty lever but does not set up the program for success by providing an expert and a robust team of strategic problem solvers, then there is little hope of measurable gains. That is because loyalty is not automated. A company needs to truly invest in their dedicated team and create a long-range strategy in order to see a strong enough uptick in customer engagement that will lead to positive monetary results. A capable loyalty team will monitor KPIs (key performance indicators) across demographic and behavioral segments to ensure the program is engaging all members. This ongoing analysis allows for continuous testing and swift pivots that lead to program structure refinement and ideal incremental financial contribution.
Now, how do we accurately measure a loyalty program’s financial contribution? As previously mentioned, my hands-on experience has led me to the conclusion that there are four key ways to prove a program’s incremental economic success.
1. Member Versus Non-Member Value – this metric can be simply defined as the financial value (revenue and profit) that a member contributes to the business annually in comparison to a non-member. For many companies, they measure this value by looking at the variance of average purchase frequency (how often they purchase from you) and average purchase total (average dollar amount spent per trip) between the two groups.
• As a baseline, companies should keep in mind the financial value of customers who convert into members prior to joining and post joining to measure true incrementality to the business.
• For programs requiring members to pay a subscription or enrollment fee to join, the loyalty program would also deliver financial benefit from those member dues.
• In businesses with a varying margin mix, member contribution can also be determined by evaluating high margin product purchases. For example, if your members and non-members frequent your business similarly and spend similarly, but the loyalty members are influenced to purchase higher margin products, then the loyalty team truly is delivering incremental financial benefit.
The loyalty goal is always to convert a non-member into a member. The program should be able to clearly
explain a delineation between the two and maintain that delineation as they recruit non-members and new customers into the membership base.
2. Member Behavior Change Contribution – this value should be measured by analyzing “look-alike audiences” or segments based on purchasing behavior within the member group. Most programs use tiers to segment their members based on the financial value to the business.
• Base Members: normally represent about 75-80 percent of your member population and have spending patterns that should be higher than non-members. Normally this higher spending is due to tailored communication and the value the member sees in the rewards offered.
• Tiered Members: the remaining 20-25 percent represent the best members/customers to the organization who’s spending patterns and frequency are higher than base and non-members. This group of members remains loyal to your brand because of your exclusive benefits, value proposition and dedication to ensuring they feel rewarded.
Now, simply saying that the higher spend is attributed to your loyalty program would be false. Instead, loyalty best practice would recommend a closer look by analyzing the member segments and their behavior over time. For instance, if the loyalty team implements a new program benefit then the team has the opportunity to analyze the segment behaviors pre and post the launch. Did the new benefit truly influence members (or a segment of members) to follow a desired action that drives incremental financial benefit? For example, did the member make one more purchase or add more to their cart in comparison with their previous sales cycle? For the skeptics out there, this is a key metric to probe on when the loyalty team deems a new benefit a success. If they say more people “engaged” or became “satisfied” because of the benefit, then they should be pressed to explain how much more in terms of incremental revenue post the launch.
3. Partner Funding – for many industries, outside partners are crucial to the success of a loyalty program. Most companies would see partners as an added value proposition to enhance their benefits by offering transactional point earning or exclusive discounts with partners. This in turn would influence consumers to engage more with the loyalty program and as a result spend more with them over time. From an additional financial standpoint, these partners can also deliver added revenue streams to the loyalty program if the program monetizes the marketing/placement of the partner brands in the loyalty member communications. In the retail industry, for example, a merchant can offer pay-to-play programs to brands in order to participate in a loyalty campaign. Let’s take a retailer double points campaign as an example. The retailer could offer a handful of brands the opportunity to participate in this exclusive marketing campaign. They would look to the brand partner to monetarily fund a few aspects of the campaign such as the following:
• The additional point liability, i.e. that extra point per dollar on the purchase
• The marketing effort around the campaign, such as creative/copy, etc.
• The beneficial placement across the marketing channels, such as email placement fees, website banners, in-store signing, paid media assets, etc.
• Any other unique logistical fees, such as technical set-up requirements
Although loyalty programs can see financial success without partner funding, the addition of such funding will boost your incremental impact significantly. For advanced loyalty programs, this partner income can be monumental
Although loyalty programs can see financial success without partner funding, the addition of such funding will boost your incremental impact significantly. For advanced loyalty programs, this partner income can be monumental.
4. Increased Customer Journey Touchpoints – for any company, a robust customer journey must be part of their retention strategy. A loyalty program should layer in cohesively to this customer journey. Loyalty touchpoints should be used as an enhancement to communicate personally and authentically to the consumer, nurturing a long-term relationship. These added touchpoints should range from communication welcoming them into the program to congratulating them for redeeming their rewards to celebrating special moments in their life like a birthday. If these communications are strategically developed with a conversion to purchase in mind, they can add a massive value to the bottom line. On the flip side, if they are basic and amateur you could see higher opt out rates and a decline in member value. Hence, another reason why I highly advocate for employing dedicated loyalty analysts in your team of problem solvers.
At the end of the day, customer loyalty is complex and unique to each company. But that’s what also makes it fun. Every business strives for a loyal customer base that contributes to financial success. A strong loyalty program is crucial in growing that base. An effective loyalty program should allow you to personally communicate with members (Increased Customer Journey Touchpoints), find out who members are and what motivates them (Member Behavior Change Contribution), reward desired b ehaviors that d rive incremental value for you (Member Versus Non-Member Value), and even a way to include partners in the customer experience (Partner Funding). Whether you are currently o n t he r oad to developing a new program or have been managing a loyalty program for years, I hope these four measurements can be of aid or act as validation that your program can drive financial value.
