When marketers are asked about evaluating the success of a loyalty rewards program, common responses may include the number of new monthly members or annual growth rate. While those statistics are important, they’re not the strongest indicators of success. At a time when businesses are making tough financial decisions, showing program growth isn’t enough. Marketers now face the challenge of justifying the very existence of loyalty programs to watchful finance departments and cautious executive teams.
The sad truth is that many marketers really don’t know if their loyalty programs are driving the right results or staying within budget.
Problems can typically be traced all the way back to a program’s conception. Designing rules, implementing technology, creating a membership Web site and selecting rewards tend to dominate the process, while establishing performance benchmarks gets lost in the excitement. After the program is launched, day-to-day operations take precedence, and it is daunting to return to square one and establish key metrics.
However, trouble arises when a program starts generating expenses and point liabilities accrue to a level that flags concern with internal accountants. If metrics were never established, there’s no way to gauge the impact of the program and justify costs on the balance sheet.
The bottom line is this - not establishing performance metrics is a huge missed opportunity to gauge the program’s impact and justify associated expenses. Loyalty programs contain a lot of different costs: the technology platform for the points engine/customer database, the program web site, call center staffing and applications, third party and internal program management, communications, and of course the largest expense—rewards and fulfillment. Programs can be expensive and may immediately get the attention of the finance department.
What about programs already in place? If a program is under way without set benchmarks identified, it’s not too late to start measuring.
Marketers need to consider five basic metrics for existing programs:
Participation rate
Attrition rate
Spend/growth rate
Accrual and breakage rates
Engagement rates
Participation Rate
This first metric is easy, and doesn’t even require customer data. It’s strictly a percentage of how many members are doing “something” in a program – in essence, spending money. Imagine that 100 members take the time to enroll in your loyalty program. You later learn that 40% of them haven’t spent a penny since joining. This is really when size doesn’t matter. Regardless of how big the program is, if 40% of members are not even getting beyond enrollment, it isn’t working.
Instead, a benchmark should be set for participation rates which can be monitored regularly throughout the program’s lifecycle. The results may surprise you…and even force a change in the program’s approach or types of customers targeted.
The 40% figure is not chosen lightly, by the way: In an analysis of more than 80 million customers across a variety of loyalty programs in the credit card and hospitality space, it was determined that 40% of participants had never engaged at the most basic level of earning a point.
Attrition Rate
Retaining customers. At the end of the day, this is what a loyalty program is all about. It’s a given that a goal must be set for this metric. For example, if your pre-program analytics indicate that your customer churn rate is 20% annually, a benchmark should be set for something less than that in the loyalty program. Keep in mind that you may have to establish a control group if your loyalty program members look different than your average customer. Establishing a definition for churn such as, “18 months of subsequent zero-purchase activity,” may also be necessary, as churn is not always based solely on members who have voluntarily left the program.
Spend/Growth Rate
Once again, pre-program analytics are critical for garnering a clear understanding of this metric. It’s important to know how your customers were spending with you prior to, and after, joining the loyalty program. For valuable customers, you may be happy with retaining existing spend levels. But for high-potential customers, you’ll be expecting to see growth-in-spend. The key is to have established goals that incorporate frequency of purchases, profitability of products and amount of time passed since the last spend.
Accrual and Breakage Rates
These metrics only apply if your loyalty program issues points or has some type of equity-building component. The accrual rate represents the percentage of points issued that are expected to be redeemed prior to being expired or forfeited. The breakage rate represents the percentage of points that are never expected to be redeemed.
Accountants become obsessed with these metrics because they have an impact on program expenses and point liability. They may also be the folks determining this benchmark, so it’s important for marketers to understand the implications of program rules, promotions and campaigns on these two metrics. Strongly related to accrual and breakage metrics is the “cost per redeemed point.” This is another metric that may be determined by your accounting staff, and one a marketer should know how to manage and impact.
Engagement Rate
This measurement can be broad and based on different observed behaviors, but the most common is redemption activity. To many marketers, the act of redemption means that the member has experienced the value proposition of the loyalty program and then engaged with the program to achieve the reward. It’s an easy metric to establish and doesn’t require pre-program analytics.
Examples of other metrics in this category include membership Web site hits; time spent navigating program sites; response rates to communications or promotions; and call center inquiries.
While a large and growing loyalty program can be impressive, it may not be the best indicator of real program performance. The five basic metrics are ones that can be established up front and used on an ongoing basis to monitor how your program is 1) impacting customer behavior, 2) remaining financially responsible and 3) generating a positive return on investment.
Even if your program has been operating for years, it’s possible to create benchmarks and begin measuring today. Metrics will not only give you peace of mind, it will allow you to have a foundation on which to make future loyalty program decisions.
Bob Konsewicz is strategy leader and senior consultant at Maritz Loyalty & Motivation
