Simple Steps to Measure and Boost Your Loyalty Program ROI

Customer loyalty is priceless as it directly impacts your bottom line. Despite market saturation, loyalty programs remain a key growth strategy, with a shift from offering rewards to fostering personalized and relevant customer experiences. Loyalty programs are now critical for collecting high-quality zero- and first-party data, essential for AI-driven marketing strategies. It's no surprise that loyalty programs have become a must-have for many companies. The real question is, how can you design a program that delivers maximum impact? The answer lies in the return on investment (ROI). But how do you measure that exactly?

Do loyalty programs pay off?

The short answer? Absolutely. If you look at the financial reports of some of the biggest brands, it’s clear that loyalty programs are driving growth in meaningful ways. Take Ulta Beauty, the largest cosmetics retailer in the U.S. – their loyalty members spend roughly four times more than non-members. Chipotle also saw a 15% growth in 2023, far outpacing the industry average of 8%, thanks in large part to its enhanced loyalty program.

Loyalty programs are essentially behavior-stimulating systems that incentivize existing customers to shop more, spend more, and stay engaged with your brand. Here’s how they can impact key business metrics:

• Customer Lifetime Value (CLV): Loyalty programs foster long-term relationships with customers, boosting their overall higher customer lifetime value to your business over time.
• Average Order Value (AOV): Loyal customers tend to spend more, often aiming to hit reward thresholds, which naturally impacts revenue growth. Programs with tiers or exclusive rewards tap into the human drive for status, encouraging larger purchases. Bundles and member-only products at higher price points further drive up AOV.
• Purchase frequency: By offering points, discounts, or rewards with each purchase, reward programs motivate customers to shop more often. Frequent rewards turn occasional shoppers into regular ones, driving up the number of transactions.
• Customer engagement and reactivation: Strategies like "double points days" or exclusive offers can bring back lapsed shoppers. These tactics keep customers engaged and transactions flowing, even during slower periods, generating additional revenue.
• Referrals and advocacy: Loyal customers are your best ambassadors, sharing their love for your brand with friends and family. Referral bonuses amplify this effect, bringing in new customers while deepening engagement with existing ones.
• Cross-selling and upselling: Loyalty programs create opportunities to upsell premium products or cross-sell complementary items. For example, offering bonus points for higher-ticket items or product bundles encourages members to spend more.
• Protecting margins: Unlike blanket discounts, loyalty programs reward customers without slashing profit margins. Offering points or future discounts helps keep margins intact while still encouraging customers to shop. Programs can also promote higher-margin products by rewarding extra points for premium purchases.
• Access to data: One of the most overlooked benefits of reward programs is the treasure trove of customer data they generate. This data helps you understand customer preferences, allowing you to tailor offers, refine pricing strategies, and maintain healthy margins while delivering value.

In short, loyalty programs don’t just reward customers – they work strategically to drive key business metrics. So let's get to measuring your program's performance.

What is loyalty program ROI and to measure it?

In simple terms, calculating the return on investment (ROI) for your loyalty program means dividing the program's profit (how much money it's making) by its overall cost. If the result is positive, your loyalty program is earning more than it costs.

But how to estimate the profit and costs? Compared to many other promotion techniques, loyalty programs represent a longer-term investment, with less tangible benefits. This makes the assessment and calculation process more complex, but not impossible.

How to choose the right loyalty ROI model?

There are plenty of ways to measure the ROI of a loyalty program, depending on how it’s designed. In "Loyalty Programs: The Complete Guide (2nd Edition)," you'll find a detailed breakdown of different approaches to help you determine which model is the best fit for your program.

1. Cost-effectiveness model

Brian Wansink's model focuses on optimizing reward costs to save money while maintaining program effectiveness. By evaluating and adjusting investment in rewards, businesses can enhance program viability without diminishing customer value.

2. Lifecycle management model

The lifecycle management ROI model evaluates a loyalty program's impact across the customer journey by analyzing revenue from acquiring new customers and retaining existing ones. It provides insights into whether new customers become repeat buyers and if current customers are increasing their spending, offering a comprehensive view of the program's effectiveness.

3. Recency frequency monetary value (RFM) model

The RFM model segments customers by purchase recency, frequency, and spending, making it ideal for tier-based programs. It helps identify high-value segments and optimize loyalty strategies for each tier to maximize ROI.

4. Coalition program model

The coalition model measures ROI in programs with third-party partners by tracking billings from partners and revenue from points earned, redeemed, or unused. It provides a comprehensive financial view of partnership-driven loyalty programs.

5. Member lifetime model

The member lifetime model assesses a customer's long-term value by tracking revenue from purchases and points activity. It highlights how the loyalty program extends customer lifecycles and boosts overall spending.

The biggest issue with calculating loyalty program ROI is that costs are easy to see, but benefits are hard to find. The Loyalty Program ROI Worksheet co-developed with Omnivy helps loyalty managers calculate loyalty ROI and evaluate loyalty program success using KPIs like customer count, purchase frequency, and average order value.

How to use the Loyalty ROI worksheet?

The Loyalty Program ROI Worksheet is a powerful tool to help you build a compelling business case for launching a new program, revamping an existing one, or even discontinuing a program that fails to deliver the desired results.

• If you have a loyalty program: Use existing data from your loyalty program or make predictions based on current performance.
• If you don’t have a loyalty program yet: Start with your customer and sales data, or create projections based on business goals and industry benchmarks.

The worksheet allows you to forecast loyalty ROI, compare performance against baselines (like pre-loyalty scenarios or previous years), and generate actionable insights for stakeholders.

How to measure loyalty program ROI?

1. Estimate the starting point

Before jumping into loyalty KPIs, start by documenting your baseline metrics without a loyalty program. These benchmarks will serve as a foundation for building accurate growth and revenue projections once your loyalty program is in place.

• Total number of customers.
• Average number of transactions per customer.
• Average transaction value.
• Average margin (profit per transaction).
• Forecasted year-over-year customer growth.
• Forecasted year-over-year growth in average transaction value per customer.
• Forecasted year-over-year growth in average number of transactions per customer.

If you’re already running a loyalty program, you can input loyalty-influenced data into the worksheet. This will serve as a valuable baseline for comparison, whether you’re considering a revamp or evaluating whether to discontinue the program.

2. Build assumptions for the first year

Three key metrics for measuring loyalty program success are total number of members, average transaction value (AOV), and transaction frequency. When making assumptions, base them on the behavior of your best (VIP) customers, as they set a realistic benchmark for potential growth.

The average number of transactions shows a member versus non-member assumption ranging from a 5% increase at minimum, 20% on average, to 50% for best-in-class programs.

The average transaction value (ATV) of loyalty program members varies significantly across industries. For general retail, member ATVs can range from a 10% minimum increase to an impressive 100% for best-in-class programs. Industry-specific figures highlight even greater potential: food retail sees increases from 25% to 400%, oil and gas retail from 10% to 50%, and fashion retail from 5% to 40%.

Again, if your loyalty program has been live for over a year already input data that you collected.

3. Analyze growth projections

Next, estimate where the loyalty program will have the biggest impact. The recommended KPIs to analyze include:

1. Forecasted year-over-year growth in average transaction value per member:
   This metric shows how much more loyalty members are expected to spend on each purchase every year. It’s a great way to see if your program is working – whether personalized rewards, smart pricing, or upselling are encouraging members to spend more over time. A higher growth rate means you’re on the right track.
2. Forecasted year-over-year growth in average number of transactions per member:
   This number estimates how much more often loyalty members will shop each year. It’s a clear indicator of how well your program is driving engagement and encouraging repeat visits. Programs that provide regular, valuable incentives usually see bigger increases in member activity.
3. Forecasted year-over-year extra customer base growth due to optimized offers:
   This metric shows how much your customer base is expected to grow each year thanks to your loyalty program and better promotions. It highlights how your program attracts new customers by offering exclusive perks, rewards, and personalized experiences that make your brand stand out. Loyalty programs usually drive customer base growth ranging from 5% in a pessimistic scenario to 10% in a realistic scenario and up to 15% in an optimistic scenario.
4. Forecasted year-over-year member growth
   This number shows how much your loyalty program membership is expected to grow each year. It reflects how well your program is reaching new people and keeping current members engaged through smart marketing, great promotions, and a focus on customer satisfaction.
5. Forecasted churn reduction
   This metric shows how much your loyalty program and retention strategies are reducing customer churn. It’s a clear sign of how well you’re keeping customers engaged and turning them into loyal advocates for your brand. Thanks to early identification of churning customers, you can expect between 5% to 30% reduction in churn.
6. Value of loyalty data
   The value of loyalty data is the monetary worth your business places on having detailed, actionable insights about your customers. It shows how much you’re willing to invest in using loyalty program data to drive personalized marketing, enhance customer experiences, and boost overall program results.

4. Compare loyalty versus non-loyalty metrics

In the next step, the worksheet will automatically build an annual data overview for loyalty and non-loyalty scenario, allowing you to compare your results with and without an active loyalty program based on the data you submitted earlier. This analysis will allow you to estimate these key metrics:

• Annual revenue with a loyalty program
• Sales growth
• Incremental revenue from the loyalty program
• Gross profit (attributable to incremental revenue)

5. Calculate loyalty program costs

We are not yet in the loyalty ROI phase yet. Before we can calculate this golden value, you need to estimate the costs of both implementation and everyday operations behind a loyalty program. In general, program costs boil down to direct and opportunity costs. The direct costs include:

• HR & support – these ongoing expenses cover mostly salaries for loyalty program managers and support specialists tasked with an unavoidable influx of customer support requests. Luckily, even large loyalty deployment can thrive under the leadership of one or two loyalty professionals.
• Loyalty program technology – here you need to consider both the one-time setup fees (if applicable), integration cost (measured in development FTEs), and ongoing subscription or upkeeping costs (if you intent to build a loyalty system yourself). The recommended approach is to stick to API-first SaaS loyalty vendors that will offer you the highest degree of flexibility while keeping the overall costs low. Note that the loyalty technology will impact the operations cost. When properly implemented, a loyalty and promotion engine can lead to substantial efficiencies in campaign management like reducing campaign creation time, minimizing coordination time between different systems, and reducing manual input from devs and staff. 
• Rewards & benefits – the highest costs in a loyalty program typically come from the rewards, but there are two effective ways to estimate and allocate this budget. One approach is to base it on a percentage of the purchase value. For example, as a retailer, you might dedicate 0.5% to 2% of the total purchase value to the loyalty program, offering this as points, discounts, or other perks. While 1% may work for most retailers, industries like travel or luxury often lean toward the higher end due to larger purchase values and customer expectations.
  Another approach is to redirect a portion of your acquisition budget towards retention. By calculating the cost of acquiring a new customer, you could allocate around 30% of that budget to retention through your loyalty program. This method helps define a retention budget by leveraging the savings from reduced acquisition costs and reinvesting them to strengthen customer loyalty.
• Marketing & communication – this cost covers the overall costs of putting the loyalty program in front of customers – think ads, media placements, or in-store merchandising. If your audience is primarily digital, the cost of both advertising and communicating the program's value is going to be much cheaper than for offline customers.
• Opportunity – this cost is by far the hardest to estimate. It includes wasting money on rewarding already loyalty and engaged customers, leading to cannibalizing your margins. Another factor to consider is the cost of other projects that got delayed (or derailed) by your loyalty investment.

6. Calculate loyalty program ROI

Now, by putting together the total program costs against total incremental profit, you will be able to calculate the loyalty program ROI.

How to optimize your loyalty program based on ROI?

If you find that your loyalty program costs more than it brings in, or it’s just not making a big impact on your revenue, you might wonder if it’s worth continuing or if it’s time to try something else. The good news is that digging into the data can help. By analyzing what’s working and what’s not, you can uncover ways to tweak and improve the program. With the right adjustments, your loyalty program can start delivering real value and benefits over time.

What to look at?

• Is the segmentation of the consumer group appropriate?
• Are you able to clearly define the benefits that the program brings?
• Do you communicate your loyalty program effectively?
• Is the process of joining the program simple?
• Which rewards are of the greatest interest?
• Have members reported any issues with how the program is designed?

These are just some examples, but such exercises should be done monthly, or at least quarterly. 

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