Methods of measuring customer loyalty: ROI

When considering adding a customer loyalty program you first need to ask how you’ll measure its impact. Start by asking: what is the return on investment (ROI)? To help you understand more about the methods of measuring customer loyalty, we’ve broken down the costs and benefits of a loyalty program and compared a loyalty program with Pay Per Click (PPC) advertising. We will cover the following questions:

  • What’s the cost of implementing and running a loyalty program?
  • How does a loyalty program increase revenue?
  • How does a loyalty program compare to Pay Per Click advertising?

 

What’s the cost of implementing and running a loyalty program?

There are four main costs associated with creating a loyalty program: software, design, marketing, and rewards.

Software is used to create and manage your loyalty program and can be designed in-house or purchased through subscription from various providers. These tend to range in price depending on complexity and support.

Design costs entail the R&D to create the style and branding of your loyalty program. This is done to ensure that the look and functionality of your program appeals to the type of customers you’re looking to attract.

Marketing your loyalty program correctly is essential. A loyalty program is a long term strategy so you should mention it in all major communication. There is little financial cost here; just a change in business process.

And, finally, rewards. The cost of these will vary and are set-up by businesses on an individual basis. They can be anything from discounts on future purchases, to small or major prizes. We’ve seen stores offer products as rewards, which can be a great way to shift old stock or increase sales on high margin product so there is a lower cost to your store.

 

How does a loyalty program increase revenue?

The main way is by increasing customer lifetime value (CLV) – the amount a customer spends in their “lifetime” with your store.

There are three key metrics that make up the CLV:

  • Frequency of purchase
  • Basket-size
  • Customer lifetime

Loyalty programs are proven to maximize all three metrics.

Loyalty programs create a constantly growing affiliation between customers and their brand, thereby increasing the frequency at which customers will return to make purchases. Similarly, as their frequency of purchase grows they will also increase the amount, or the basket-size, of their purchase per-visit.

Finally, loyalty programs maximize the lifetime of a customer by increasing retention. While it is easy to believe that simply having a high-quality product or service will create customer loyalty, the truth is that customers are in high demand so loyalty is something that must be earned over and over again.

“Keeping one more loyal customer is the equivalent of gaining 95 new customers!” – Bain&Co

 

How does a loyalty program compare to Pay Per Click advertising?

PPC is used predominantly to attract new customers and is often the favourite choice for marketers because the ROI is easy to measure. However, if your store sells products with low profit margins it is unlikely that PPC spend will generate profits because you will pay too much to acquire the customer. In this case, you will require repeat purchases to break even and make a profit.  Research by Bain & Co supports this:

“Online fashion stores are only profitable once a customer buys more than four times”

In contrast, loyalty programs not only create better long-term prospects for a company (i.e. increased sales, market growth, customer retention etc.), they also have just as strong an ability to attract new customers as PPC because on average loyal customers are proven to tell nine other potential customers of their positive experience. 

Source: Bain&Co

Conclusion

What we have seen here is how a loyalty program generates revenue and what that looks like compared with a familiar channel – PPC. The next logical question is: “how much revenue will a loyalty program generate for my store?” We’ll cover that in the future so keep reading.

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