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    How to Know if Your Loyalty Program is Working

  • Are these new loyalty programs truly adding value to your brand? Here's how to find out.

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    It's important to convince your stakeholders and yourself that your loyalty program is providing a competitive advantage.

    The quick-service restaurant customer loyalty landscape is constantly evolving. Technical innovation has made it easier than ever to launch, analyze, and optimize a loyalty program’s member experience and value proposition. Within the past year, new or revised programs have been introduced by Chili’s, Subway, Chuck E. Cheese, 7-Eleven, and others. Chipotle has plans to launch a new loyalty program this year.

    Each of these programs is designed to achieve similar goals: enhance the customer experience, provide insights that drive incremental spend, and differentiate the brand to gain preference and share of wallet over competitors.

    One of the benefits of a modern loyalty program is the data it generates. Dozens of factors can be measured. What are the right metrics to analyze if a loyalty program is on the right track?

    Here are six important metrics you should be using to know if your loyalty program is working:

    Member Value

    Are your loyalty program members more valuable than your non-loyalty customers? If the average lifetime value of loyalty program members exceeds that of non-loyalty customers, it is fair to say the loyalty program is working as designed. Higher member value also means the program is worthy of further investment to grow it. A Paid Search or Paid Social campaign focused on loyalty program acquisition could have a positive ROI when member acquisition costs are lower than the incremental lifetime value gained by converting a non-loyalty customer into a new loyalty program member.

    Share of Sales Transactions on Loyalty 

    What percentage of your total sales transactions are linked to loyalty program members? More sales transactions connected to loyalty program members means a greater ability to gather customer insights and change behaviors across a larger member base, thereby increasing the ROI of the program. As a benchmark, Panera and Starbucks report an average of 40 to 50 percent of total sales transactions connected to their loyalty programs. How to acquire more members? Target existing customers with multi-channel marketing and communications focused on the program. Offer incentives to compel them to sign up. Effective employee training and incentives can also boost program acquisition rates.  

    Incremental Sales

    Is your loyalty program driving incremental sales? It is critical to the life of a loyalty program to provide evidence to a CEO and CFO that the program is driving incremental sales that would not have otherwise occurred if not for the existence of the program. Otherwise, they might just unwind the program and shut it down to eliminate the program’s costs. Use randomly-selected test and control groups of loyalty members and non-loyalty customers to monitor and track the following:

    • Which sales transactions were truly incremental in that they would not have occurred if not for the presence of the loyalty program, and
    • Which sales transactions would likely have occurred anyway

    The key metric is a lift in sales from the test group over the control group. Ongoing testing of sales incrementality will not only help satisfy C-level interest in the loyalty program over the long term, it will also help establish the business case for future investment dollars to grow the program.

    Member Frequency & Spend

    Is your loyalty program driving more valuable purchase behaviors from members?  Segmenting members into distinct value groups can help quantify and identify those members who are most valuable, have the greatest potential for incremental behaviors or are at the highest risk of attrition.  A traditional Recency, Frequency and Monetary (RFM) analysis can pinpoint opportunities for retention, upsell, cross-sell and stimulation among the different value groups. Loyalty-linked CRM programs aimed at changing behaviors of members in each group can help increase the value of those members by encouraging an incremental visit, adding an incremental item to their next ticket, or upgrading to a higher margin product or service.

    Loyalty Transactions on Discount

    Is your loyalty program using discount offers to drive more profitable behaviors from its members?  A loyalty program should not merely be a discount program for heavy-use customers who were going to buy from your brand anyway. A loyalty program that relies on discount offers must generate incremental sales that underwrite not only the costs of those incremental sales but also the costs of all discounted sales that would have occurred anyway and yet were unnecessarily discounted. 

    You have to have a plan to measure and monitor how much the loyalty program is discounting necessarily to drive incremental sales and how much it is unnecessarily reducing the profit margins on those discounted sales that would have happened anyway. The difference has to be positive financially to ensure the loyalty program is adding value to your company’s bottom line.

    Loyalty Program ROI

    Is your loyalty program generating a positive return on investment, and is that return large enough to benefit your company’s shareholders?  Considering all of the resources and expenses required to operate and maintain a loyalty program, a CEO and CFO are likely to view a loyalty program as an ongoing investment that requires an annual return exceeding the company’s average cost of capital to justify its continued funding, just like any other corporate project or program. After all, a loyalty program has to be creating shareholder value or it’s not making a positive enough impact on the business and should be discontinued.

    So, where should your loyalty program be in terms of performance against these metrics?  While it’s tempting to want to gauge your program’s performance against that of other companies’ loyalty programs, establish your own performance hurdles that are unique to your company to determine success. Benchmarks like average cost of capital and positive lifts over control groups work great and reflect the unique nature and needs of your company’s business. After all, the very essence of any loyalty program is about enhancing customer retention – gradually stealing visits, sales and profits away from your company’s competitors as your program convinces consumers to reduce their switching among your company and its competitors for their purchases.

    Use these six important metrics to convince your stakeholders and yourself that your loyalty program is providing a competitive advantage to your company and creating shareholder value for its owners.

    Mike Bradley, is the VP, Strategy at Ansira. Logan Flatt is the SVP, Strategy at Ansira. Ansira is a leading data-driven, technology-enabled marketing solutions provider, specializing in the integration of local and national marketing programs through marketing automation, data analytics, CRM and performance media. Ansira leverages superior marketing intelligence to build deeper, more effective relationships with consumers and retail channel partners that engage them on the local level. It enjoys long-term client relationships with Fortune 500 companies spanning a broad range of industries, including automotive, dining, retail, consumer packaged goods, technology and specialty services.