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How to unlock value from, measure and demonstrate loyalty program ROI

Loyalty programs can drive business growth and strengthen customer relationships, but determining their true value can be a challenge.


In brief
  • Advanced analyses are needed to assess the full impact of loyalty programs.
  • Businesses must consider all costs — direct and indirect — when evaluating their loyalty programs. 
  • Getting a complete picture of a loyalty program’s business benefits can involve quantifying intangible elements such as brand loyalty and advocacy.

Loyalty programs are no longer just nice-to-haves; they are critical business strategies that drive customer retention, growth and brand loyalty across industries. Based on the 2024 EY Loyalty Market Study, which addressed both consumers and brand loyalty leaders, loyalty programs increase brand affinity and the likelihood of repeat purchase. Compellingly, 58% of consumer respondents reported increasing spending a moderate to great extent. This data reflects the influence that well-structured loyalty initiatives can have on consumer behavior and overall business growth.

But these programs do not come without challenges. The biggest obstacle faced by brands with loyalty programs is measuring the financial impact of loyalty efforts. Despite tracking and optimizing on many specific key performance indicators (KPIs), brands struggle to quantify their overall loyalty program ROI. In fact, 41% of corporate loyalty leader respondents reported challenges with quantifying overall program impact. To address this challenge, businesses must adopt a comprehensive approach to measuring the value of their loyalty programs by examining both direct and indirect costs and benefits.

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Chapter 1

A ‘chicken or the egg’ problem with loyalty program ROI

Do loyalty programs help create higher-value customers, or do higher-value customers disproportionately join loyalty programs?

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.

Loyalty program indirect costs are just as significant

Loyalty programs must navigate myriad legal and regulatory requirements, which can vary widely by region and industry. Compliance with data protection laws, consumer rights and promotional regulations are some legal complexities that can incur costs. These expenses are necessary to help the program operate within the bounds of the law and maintain the trust of its participants.

The points or rewards that customers accrue represent a financial liability on the company’s books. Properly accounting for and managing this liability is crucial to maintaining financial accuracy and forecasting future obligations. This requires sophisticated accounting practices and may involve actuarial assessments to estimate the timing and magnitude of reward redemptions. 

A loyalty program generates vast amounts of data that must be securely stored, managed and analyzed. The insights gleaned from this customer loyalty data are invaluable for personalizing customer experiences and improving program offerings. Costly investments in data management systems and analytics personnel are necessary to unlock the full potential of the data collected.

Providing support to loyalty program members is essential for resolving issues, answering questions and maintaining customer satisfaction. Whether support is provided through a dedicated call center or allocated among existing staff, these services represent an ongoing cost. Efficient and effective customer support helps retain members and enhances overall program perception.

These indirect costs are integral to the operation of a loyalty program and must be factored into the overall assessment of the program’s value. By acknowledging and managing these costs, businesses can confirm that their loyalty programs are not only appealing to customers but also financially sustainable in the long term.

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Chapter 2

Capitalizing on direct business benefits of loyalty programs

Loyalty programs are not just a mechanism for rewarding customers; they are a strategic tool that drives significant direct benefits to businesses.

One of the most immediate impacts of a loyalty program is its ability to encourage higher spending per transaction. By offering rewards for cross-selling and upselling, as well as incentivizing repeat visits, loyalty programs effectively motivate customers to spend more during each interaction with the brand. This increased spend is a direct result of the perceived value customers find in earning rewards, which in turn benefits the business’s bottom line.

Loyalty programs play a pivotal role in retaining customers, thereby reducing churn and increasing the lifetime value of each customer. By fostering a sense of belonging and appreciation, loyalty programs make customers more likely to stick with a brand over time. This enduring relationship drives a steady stream of revenue and reduces the costs associated with acquiring new customers.

Loyalty program indirect benefits: data insights, emotional loyalty, brand advocacy

Customer loyalty programs enable companies to collect customer data, providing insights into customer behavior. This data allows for a deeper understanding of customers, leading to more personalized interactions. By comparing the data from loyalty program members with that of non-members, businesses can fine-tune their marketing strategies to make more customized product recommendations. Furthermore, this data collection aids in evaluating how targeted marketing efforts for loyalty members perform against general campaigns. It also supports the use of predictive analytics to reduce customer turnover and identify opportunities for upselling.

Strengthening emotional ties with customers creates long-term advocates who drive word-of-mouth marketing and customer referrals. To measure this indirect value, indicators like the Net Promoter Score, social media advocacy, customer reviews and the frequency with which loyalty members recommend a brand to their network, compared with the average customer, are considered. For programs with experiential rewards, the degree of participation in incentives that aren’t purchase-based is evaluated.

A strategically designed loyalty program can become a distinctive feature, setting a brand apart in the competitive landscape. Metrics such as retention rates of loyalty members versus non-members can be analyzed and compared with competitive programs. By tapping into the perceptions of loyalty program members, brands can discern how members value and distinguish their program from those of competitors. Benchmarking a loyalty program against others in the industry provides a comprehensive view of its position, enabling brands to identify areas for growth and capitalize on competitive strengths.

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Chapter 3

Optimizing loyalty program ROI measurement and business impact

Establishing benchmarks for KPIs creates a baseline that allows for a comparison of pre- and post-loyalty program implementation, a fundamental step in understanding the program’s effectiveness and guiding future strategic decisions.

Defining clear success metrics informs KPIs that align with business objectives. Such metrics include customer lifetime value, incremental sales lift, program engagement rates and churn reduction. 

By quantifying intangible benefits such as brand loyalty, advocacy and customer satisfaction through methodologies like customer surveys, Net Promoter Scores and sentiment analysis, businesses can isolate KPIs and benchmark them over time. This approach ties directly to measuring ROI by providing a clear picture of how loyalty programs influence customer engagement and advocacy, which are critical components of sustained business success. 

Adopting a long-term perspective when evaluating loyalty programs can be established by tracking customer behavior and the overall health of the business over an extended period. With this outlook, businesses can discern patterns, adjust strategies as needed and position their loyalty program so it contributes positively to sustained growth and profitability.

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Chapter 4

Avoiding common loyalty program pitfalls

The hallmark of a successful loyalty program is its capacity to cultivate a deep and enduring connection between the brand and its customers, moving beyond mere transactional interactions to create lasting bonds.

Focusing solely on short-term sales can inadvertently hinder the sustainable growth of customer relationships. Although a sudden increase in revenue is always a positive outcome, the real dividends come from nurturing ongoing customer engagement, which fosters loyalty and encourages repeat business.

Loyalty programs demand ongoing attention and adaptation; they are dynamic, not static, endeavours. The process of continuously gathering and integrating customer feedback, coupled with the analysis of performance data, paves the way for iterative enhancements. This approach keeps loyalty programs aligned with the evolving needs and preferences of consumers, thereby maintaining their relevance and effectiveness over time.

At its core, a loyalty program must prioritize the customer experience, which is the foundation upon which its success is built. Programs that become overly complicated can quickly disenchant customers, leading to disengagement. To avoid this pitfall, it is essential to adhere to the principles of simplicity, clarity and value. These elements are the bedrock of any successful loyalty program. By placing the customer experience at the forefront, businesses can develop programs that not only attract customers but also inspire them to actively participate and become vocal advocates.

For a loyalty program to truly flourish, it must be intricately woven into the broader marketing strategy of the business so that every interaction with a loyalty member is enriched with insights into their preferences and behaviors. Such a holistic approach enables the delivery of more personalized and targeted marketing initiatives, which significantly enhance the customer experience. Moreover, this integration fosters more efficient campaign outcomes and nurtures long-term relationships, ultimately contributing to the program’s success and the brand’s sustained growth.

Conclusion

Loyalty programs are complex instruments that deliver strategic value well beyond the immediate financial gains. For businesses to fully realize the true worth and potential of these programs, a comprehensive approach is essential — one that considers the full array of both direct and indirect costs and benefits.

The direct costs are the visible investments made in the program, covering the spectrum from rewards to the technology that supports the platform, as well as the marketing, training and operational support necessary to maintain it. While these costs are readily quantifiable, indirect costs, though less obvious, are no less critical. These include the legal and compliance obligations, the management of points liabilities, the intricacies of data analytics and the provision of customer support services.

The direct benefits of loyalty programs manifest in various measurable ways: Customers tend to spend more, stay with the brand longer, make purchases more frequently and increase the size of their transactions. Moreover, the associated marketing costs to activate loyal customers often decrease. The indirect benefits, while more intangible, are equally impactful. They encompass the rich customer data that drives more informed marketing strategies and product development initiatives, as well as the emotional connections fostered with customers, which translate into brand advocacy and organic word-of-mouth promotion.

To gauge the true efficacy of loyalty programs, a comparative analysis of loyalty member behavior against that of the general customer base is indispensable. Such an analysis illuminates the loyalty program’s role in enhancing customer engagement, driving profitability and amplifying the brand’s influence. By assessing the entire range of costs and benefits, businesses can construct a detailed understanding of how loyalty programs contribute to their enduring success and growth.

Special thanks to Taylor Harvey, Senior Consultant, Ernst & Young LLP, and Anna Buckley, Assistant, Ernst & Young LLP, for contributions to this content.

 

Summary 

A customer loyalty program can drive a wide range of business benefits, but measuring its true impact is often difficult for companies. Developing a clear view of loyalty program ROI requires businesses to take a comprehensive approach that considers the complete spectrum of direct and indirect costs and benefits.

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