I’ve had the pleasure of working with a wide spectrum of brands and businesses on their customer loyalty strategies and specifically their current and future customer loyalty and rewards programs.
By: Adam Posner, CLMP
[Editor’s Note: The community of Certified Loyalty Marketing Professionals™ continues to expand globally. Adam Posner CEO and Founder, The Point of Loyalty is a highly recognized loyalty marketing professional in Australia and recently earned his CLMP™.
In today’s featured article, Adam addresses an issue that impacts the profitability of most loyalty programs. While the incremental visits, sales, and gross profit that results from successful loyalty programs garners most of the attention in the business case, Adam reminds us that a hidden and easily overlooked issue can be quite costly. We hope you enjoy this examination of the "Cost of Lost Customer Loyalty".]
Shift some focus from achieving gains to preventing losses
When we discuss measures of success, the common measures and categories defined are focused on ‘growth and gain’. In general terms, they are as follows:
- Member volume and contact-ability
- More behavioural insights for personalised member interaction
- Revenue (profitably) through incremental spend and frequency of visit
- Member lifetime value (vs non-member)
- Active retention
- Positive return on loyalty investment
- % of loyalty revenue vs total revenue
- Program interaction and communication measures
These measures are fundamental to maintain a profitable and sustainable loyalty and rewards program strategy.
But what about the Cost of Lost Customer Loyalty?
A measure not often mentioned (if at all) is reducing the ‘cost of lost’ customer loyalty/members.
“To know the ‘cost of lost’ members, is to reduce the ‘cost of lost’ members.”
How do you calculate the ‘cost of lost’ members?
Step 1: Define what a ‘lost’ member is?
- To keep it simple, use unsubscribes from communications as the definition of a lost member.
- This is not the purest definition as an unsubscribe could be a… ‘stop sending me the communications’ rather than ‘I don’t want to be part of the program’.
- However, an unsubscribe from a communication loses the opportunity to communicate and motivate a behaviour (spend or visit).
A ‘lost’ member = unsubscribed member
Step 2: Calculate the future value of a member or lifetime value
- Losing a member means you lose the opportunity for future incremental revenue
- You can do predictive modelling, or you can use past spend behaviour as an indication of future income and allocate a time period in the future
- You can also calculate the net future value (i.e. future value less cost of rewards)
The value of a member = potential spend in the future
Step 3: Calculate the cost to acquire a new member
- Calculating the cost to acquire a new member is based on the costs you can attribute to enrolling a new member.
- With a new program to be launched, this could be based on adding all costs associated with development and launch of a program including people, technology, marketing
- Add ongoing costs e.g. rewards, people, marketing, and technology
- At the end of year one, attribute the total cost (setup and ongoing) to the number of members gained (To keep it simple, the number of members gained is the total gross number of members enrolled rather than active members).
The cost to acquire a member (defined period e.g. 12 months) = development and launch costs + ongoing costs / number of members enrolled
An example of calculating the cost of lost customer loyalty:
For the financial folk reading this article, I accept there are many variables and more specific considerations in calculating the ‘cost of lost’ members. This example is provided purely to bring to life the need to measure the ‘cost of lost’.
End of year 1:
Number of members enrolled: 100,000 Number of unsubscribes: 3% = 3,000
Net future value: $500 per member
Future value lost: 3,000 members x $500 = $1,500,000
Cost to launch in year 1: $500,000
Cost per member to acquire: $5.00
Cost to acquire=3,000 x $5 = $15,000 (sunk cost)
Cost of lost = $1,515,000
Cost of lost = lost members and their potential future revenue lost + sunk cost of acquisition
Remember too that losing a member can also include the loss of new members from referrals. If you can work out the referrals gained from your members, then this is another dimension to add to the calculation of lost — the revenue lost from new members introduced from lost members.
Don't just focus on the gain
Avoiding pain is arguably a more powerful motivator to take action than enjoying a gain. If you're only focusing on the incremental gains from a program, you could be missing out on an acute point-of-pain. When you calculate the magnitude of financial impact from member attrition and understand the ‘cost of lost’, you should be motivated to take action to reduce the ‘cost of lost’.
The question that begs answering is "how" members become lost. People that drop out of programs do so for a myriad of reasons, but poor earning velocity, unexciting rewards, poor use of data, and underperforming communications are probably the most oft-seen root causes of membership loss. The 2019 Delphi report highlighted additional reasons contributing to member attrition and you might want to check the Delphi list against your own program performance.
In summary, make the “cost of lost” customer loyalty visible. See the loss, feel the pain. Take action. Enjoy the gain. Have a happy loyalty day!