Why and how to calculate your return on investment?
The benefits of operating a customer loyalty program are attractive to both consumers and businesses. For consumers, these programs can offer significant savings, as well as an enhanced personalized experience. For businesses, there are significant benefits that come with a loyalty program.
It allows them to acquire valuable data and engage their customers so that they buy from them rather than from a competitor. A loyalty program can also have a significant impact on increasing sales.
In fact, consumers are joining more loyalty programs than ever before. On the corporate side, the Global Customer Loyalty Report, conducted by Antavo in collaboration with PwC and stratLX, indicates that 56% of the companies offering a loyalty program are satisfied or very satisfied with their program
Why is it important to calculate the return on investment of your loyalty program?
Loyalty marketing has the unique advantage of being measurable. Yet too few companies actually calculate and track the profitability of their program. In fact, only 32.8% of companies surveyed that offer a loyalty program reported measuring their program’s ROI. In contrast, 93.1% of those that do measure the ROI of their program reported a positive ROI.
Ignoring your loyalty program’s return on investment is like becoming a millionaire (or poor!) without knowing it and continuing to live as if nothing had happened. On the other hand, knowing your return on investment allows you to adjust your strategies along the way in order to maximize the benefits.
A major incentive to invest in customer loyalty
Measuring and demonstrating the profitability of your loyalty program is a major incentive for its development. Whether it’s investing in new technologies, developing reward packages or increasing the level of personalization, loyalty initiatives are much more likely to be adopted within companies if they can demonstrate the performance and profitability of their actions.
With 81.9% of companies that offer a loyalty program planning to significantly increase their customer loyalty investments over the next three years, development and creativity will be important factors to the program’s success.
More informed decisions
Measuring the profitability of your loyalty program also allows you to better identify what actually works and what doesn’t (or works less). This way, companies can adapt their strategy to improve performance. Without measuring, it is impossible to clearly identify the performance of your loyalty initiatives.
There are several questions companies may ask themselves when implementing or developing their program. Should they offer a tiered program? Should it be a paid premium program? Should it be a discount or free reward program? What will provide the best return?
All these questions can be answered by calculating the return on investment of your loyalty program. This can be done in a simulation, prior to its launch or on an ongoing basis once it is launched.
According to our study, companies offering a tiered loyalty program reported a return on investment 1.8 times higher than those who do not offer tiers. This is not to say that all companies are suited to tiered programs, but it does reinforce the importance of measuring the ROI of your program.
How do you calculate the return on investment of your loyalty program?
To measure the profitability of a loyalty program, it is important to look beyond costs. Loyalty should be viewed as a revenue generator, not a cost center. To that end, 59.5% of the companies in our survey said that their executives consider the loyalty program as a revenue center.
This means that these companies are generating more revenue than it costs them to run the loyalty program.
So the first step in determining if your program is profitable is not only to identify the costs associated with it, but also the additional sales and profit margins it generates or is likely to generate, whether your program is launched or not.
Additional revenue can come from member activity (increased order value, more frequent visits, increased wallet share, subscription-based revenue, etc.) and from funding rewards through partners. Increased market share may also need to be considered.
If the financial rewards exceed the expenses, then your program is profitable and you have a positive return on investment.
To understand the true success of your program, you should also look at secondary benefits, such as reduced acquisition budgets. In addition, look at the non-financial benefits, such as increased customer satisfaction. All of these elements will allow you to measure the true success of your program. Ultimately, the benefits must outweigh the costs.
Want to learn more about calculating the return on investment of your loyalty program? Don’t hesitate to contact us. We will help you measure the performance of your program.
