What’s the Bottom Line? 4 Steps to Measuring Your Loyalty Program’s Financial Performance
You have a loyalty program and your customers are engaged, are earning and redeeming rewards, and are pretty satisfied with the program. Still, you may be asking yourself (or maybe your CFO is asking), what is my program truly contributing to our bottom line? After all, your loyalty program should be driving incremental revenue and profits, beyond just happy and loyal customers. This needs to be a win-win situation. So how do you measure your program’s financial contribution? While every program is unique, we’ll share a 4-step high level approach for estimating loyalty program financial contributions below:
STEP 1: Estimate Incremental Revenue – This step requires a bit of estimation, but the goal is to estimate the incremental revenue the program is generating from its active members. For simplicity, we’ll assume we’re measuring for a 12-month period. Summarize the average spend per member over this period. If you have multiple tiers, you may want to do so by tier level. This is the total spend per member, but to determine incremental spend, you need to measure it against a comparable control. At Brierley, we use several methods to estimate:
- Control Market: This isn’t typically an option, but if there is a comparable market(s) without loyalty, you can measure average spend, transactions, and order value vs. loyalty markets to gauge incrementality.
- Cohort Analysis: With this method, you analyze the pre-loyalty program purchase behavior of members and identify similar performing customers (cohorts) who are not in the program (typically over 6-12 months) and compare behavior during the program measurement period. Typically, there is a statistically significant lift in spend vs. the non-member cohort.
- Regression Model: This method requires a little more analytical horsepower, but essentially involves building a multi-variate regression model that explains the spend of members vs. non-member customers. All independent variables are consistent between the 2 models – with the “unexplained” variable differential between the 2 models representing the incremental program revenue contribution. A few technical notes to consider:
- Mixed econometric techniques can work well in concert with one another (e.g., logistic regression for retention, OLS for revenue and/or Poisson for transaction frequency).
- Corrections for selection bias will adjust and stabilize estimates (two-phased techniques like Heckman are now widely used).
STEP 2: Quantify incremental direct variable margin– Estimate it based on what was earned from incremental revenue estimated in STEP 1. Note that in most cases, margin is the best measure of incremental program contribution. It’s unlikely that your program is driving incremental fixed costs or additional variable costs for each sale. If so, CONGRATULATIONS! You must have a really strong program. If your program financial and customer database is sophisticated enough to capture margin information from member sales at an individual member level, you can use actual margins earned. If not, it’s typically fine to apply an overall average direct variable margin rate for the measurement period.
STEP 3: Quantify Program Expenses– These can be summarized in 2 overall categories--reward & benefits costs, and dedicated program expenses. Keep in mind that you should only be counting expenses that are directly incurred because of the loyalty program. In some cases, costs may be shared between loyalty and other marketing or corporate functions (i.e., communications, customer service support, marketing management). In these cases, allocate these costs based on pro-rata loyalty program level of effort or resource share.
- Reward and Soft Benefits Expenses: This is the $ value and cost of rewards redeemed. Brierley recommends tracking the value of rewards both earned and redeemed. The value will be the value to the customer (i.e., $10 reward good toward next purchase). To be conservative, we recommend setting the cost of a universal dollar denominated reward redeemed at full value to the member. However, if your program rewards specific items for set point levels (i.e., 50 points for free beverage, 100 points for sandwich), the reward should be valued at the price to member but costed/expensed at the variable direct cost of the item redeemed. (i.e., menu price of coffee is the value to the member- $2, but it only costs $.75- the cost to the program)
- If you have additional soft or “hard” benefits for your program such as free gift wrap, exclusive events, birthday gifts, or other member perks, include the incremental cost for these benefits. Exclude the cost of any benefits available to all customers (not just members)
- Dedicated Program Expenses: These are expenses directly related to operating the program. Examples include:
- Loyalty Technology Platform(s): Include the annual licensing and support, management and support fees.
- Amortization of Build: If your program is fairly new, or was recently updated, you may be able to amortize the design and build investment over the term of your partner’s contract. Check with your accounting team for more information.
- Dedicated direct marketing: Include the cost of email, direct mail, SMS, app messaging and other direct communications solely for the loyalty program.
- Advertising/Creative: Direct advertising/promotion shared costs. This includes dedicated point of sale materials, banners, and promotions with loyalty messaging as a material element. In many cases, loyalty is secondary/tertiary within overall marketing campaigns, so you should be able to negotiate here.
- Direct or Allocated Personnel: To the extent you have dedicated employees supporting the program, or allocated headcount, include their cost here.
- Other Expenses: Depending on your program, include other dedicated expenses incurred on behalf of the program. Some examples include ongoing vendor, agency, or partner support fees, app management and support fees, and employee training.
STEP 4: Summarize & Review Program Financial Impact- Calculate the program’s estimated financial contribution:
Incremental Revenue (Step 1)
X Margin (Step 2)
= Estimated Incremental Margin
LESS: Program Expenses (Step 3)
= Estimated Program Contribution
Calculate the program’s ROI (Return on Investment) by dividing the Estimated Program Contribution by Total Program Expenses.
In summary, this high-level framework can help guide your efforts in determining your program’s bottom line. If your program isn’t delivering the impact you’d expected, or if you would like an independent review of your program and its potential, Brierley has a suite of F.A.S.T Track consulting services including Program Health Assessments and a Program Cost-Benefit Analysis which can help you take your program to the next level.
About Brierley
Brierley is the industry leader—transforming loyalty around the world. Our focus is turning client challenges into successful and profitable loyalty program solutions. Brierley brings together innovative thought leadership, unparalleled expertise, and advanced technologies to help brands win customers’ hearts and minds. In addition to our evolutionary platform LoyaltyOnDemand®, Brierley offers the full breadth of services to drive unprecedented loyalty success: program design, strategy, research, analytics, customer insights, creative, and digital solutions.
