The Most Effective Loyalty Metrics for Measuring Customer Loyalty ROI

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By: Len Llaguno |

Posted on December 20, 2018

When it comes to your company's loyalty program, it's not enough to know that loyalty programs frequently accomplish their objectives — you need to have a concrete inventory of metrics for accurately gauging the efficacy of your company's program at any given moment.

Such metrics should take into account a variety of factors, including how much the redemption of each point costs your company, the percentage of outstanding points that are ultimately redeemed, and which members are most likely to drive redemptions.

Failure to dial into the pulse of your program's effectiveness using the correct metrics can result in revenue loss stemming from both an improperly incentivized subscribership and the operational costs that accompany sustaining a loyalty program with a negativeROI.

Read on to discover which loyalty program metrics you should be using to diagnose the utility of your company's loyalty program.

A/B testing isn't sufficient

Many companies use A/B testing — or the practice of comparing the spending patterns of a group of customers who have received a particular promotion against those of clients who have not been offered the same incentive — as their go-to method of choice for assessing the effectiveness of a campaign.

The difference in spending rates between the two groups of customers is the campaign’s return on investment (ROI). 

However, for A/B testing to be accurate, there must be a defined closing date for the campaign, and the results must be compared against a stable baseline.

As a result, A/B testing is one of the least effective loyalty program metrics because loyalty programs usually lack an end date. Instead, they typically extend deep into the lifespan of the member and sometimes end only when the member passes away.

Customer lifetime value (CLV)

Instead of metrics that focus on member behavior over a short period of time, companies should use tools that allow them to capture the full arc of member behavior, including how members will behave in the future.

One of the best methods of capturing this information is customer lifetime value (CLV).  CLV reflects how much free cash flow a member will create for the company over the period of time in which they are enrolled in the program.

Members with a high CLV indicate that they are the customers for which resources and efforts should be focused; conversely, members with low CLV should have resources deflected and more appropriately allocated.

Customer future value (CFV)

Using the formula below, your company can determine how much free cash flow a customer will produce in the future (without relying on revenue already produced). This loyalty program metric is useful because it allows you to identify which customers are currently the most likely to drive high returns, which, in turn, informs the selection process of campaign targets.

In a healthy loyalty program, CFV numbers will be large and show galvanized, upwards momentum.

Customer potential value (CPV)

Though it's important to know which members drive company revenue, it's equally as critical to identify which customers are the easiest to convert into high-value assets. These customers, and their corresponding value, are referred to collectively as customer potential value(CPV). 

Using CPV, you can pinpoint which customers are a gentle nudge away from contributing significantly to your revenue stream, and use that information to unlock previously-inaccessible streams of income.

The bottom line

Employing customer-specific loyalty program metrics allows for a high-definition, precise view into which members should be courted most strongly, as well as which have the potential to be transformed into invaluable resources.

The competition will not fail to take advantage of whatever tools are available for improving the efficacy of their campaigns. Will you?

Read more from Len Llaguno here.

This article has been republished from Kyros Insights.
Len Llaguno is the founder of Kyros Insights, a leader in loyalty program liability solutions. Kyros helps loyalty programs predict member behavior and manage complex financial reporting of program liabilities.