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A key challenge in measuring the impact of loyalty programs is that a company’s best and most loyal customers are also the ones most likely to sign up for the company’s loyalty program.
Measuring loyalty vs. non-loyalty customer behavior ignores potential differences in customer types and rightfully incurs scrutiny among statistically minded reviewers of loyalty program performance, such as finance teams. Using a mix of cross-sectional and longitudinal analyses, such as pre-/post-comparisons or difference-in-difference analyses, provides a more robust and defensible analysis of the impact of a loyalty program. However, getting an accurate before-and-after snapshot of customer behavior can be difficult.
One of the primary benefits of a loyalty program is better customer data. This is particularly true for consumer packaged goods and other companies that do not control the point of sale and cannot perform functions such as tracking purchases through credit card, or ship-to-address matching, to quantify pre-loyalty sign-up purchase behaviors. To measure the effectiveness of loyalty programs, these companies can use A/B testing or split new loyalty members into test and control groups. While these techniques can be challenging to implement, they offer clear insights into customer behavior and the loyalty program’s impact.
Measuring the performance of these solutions can be done using key metrics such as customer lifetime value, purchase frequency, average order value, redemption and engagement rates. Behavioral and emotional metrics such as Net Promoter Score, social engagement and referral rates are also necessary to consider.
Accounting for key areas of loyalty program direct costs
The core of any loyalty program is the rewards offered to customers. These rewards, ranging from discounts and points to free products or services, represent a significant financial cost. They are the primary incentive for customers to participate in the loyalty program and must be carefully balanced so that they are attractive to customers while still being cost-effective for the business.
The digital backbone of a loyalty program is its technology platform. This encompasses the costs associated with implementing and maintaining the necessary software, integrating with existing or new CRM systems and managing the data collected through the program. These expenses are crucial for the smooth operation of the program, enabling the tracking of customer interactions, the redemption of rewards and the analysis of program effectiveness.
Beyond the technology infrastructure, there are substantial operational costs involved in running a loyalty program. These include the staff and administrative costs related to program management, such as marketing, training and customer support. Additional costs can include things like fraud prevention and monitoring, as well as ongoing technology maintenance, which must be considered so that the loyalty program runs securely and efficiently.
These direct costs are the tangible investments that businesses make to create and sustain loyalty programs; they are essential for day-to-day functions. By carefully managing these costs and aligning them with the strategic goals of the loyalty program, businesses can create a strong foundation for building lasting customer relationships and driving long-term growth.