How to Evaluate and Measure Loyalty Program Success

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Loyalty programs are nothing new, but that doesn’t mean they’re outdated. According to the research group Colloquy, there are 2.65 billion loyalty program memberships in the U.S. alone. On average, US households are involved in 21.9 loyalty programs, yet only active participate in 9.5 of them. Each year businesses allocate about $48 billion towards loyalty programs (in the form of free rewards, discounts, or special promotions), of which only two-thirds are ever redeemed by customers. That might sound great from a company perspective, but it’s likely indicative of poor customer engagement.

A well-done loyalty program can boost repeat business and help customer satisfaction. Below, we’ve highlighted the advantages and disadvantages of different loyalty systems, and how you can assess their effectiveness:

Point System

The most basic loyalty program is the points system. Frequent customers earn points with every purchase they make, usually with a member card. These points accumulate into some sort of discount, or customer advantage.

A point system is a great loyalty program for businesses whose customers make small but frequent purchases. One of the great point system loyalty programs is Starbuck’s “My Starbucks Rewards.” It’s also one of the most popular, with over 10 million active users. At its core, it’s a simple point system. However, Starbucks mixes in random discounts and special birthday rewards to keep their customers from becoming bored.

If your business chooses to implement a point-based rewards program, remember to keep the sign-up process simple, and vary your reward offerings to keep customers interested.

Tier System

The difference between a tiered program and points program is that a tiered program can offer greater rewards in the long term. The tiered system works by first offering small rewards for joining the program, then increasing the value of rewards as customers become more loyal.

Southwest Airlines’ successful Rapid Rewards program is a point system that has three different tiers of rewards: A-list, A-list preferred, and companion pass. Moving up the point ladder unlocks privileges such as priority boarding, free inflight Wi-Fi, a 100% points earning bonus, and eventually a companion pass that allows one friend to ride one free round-trip flight.

Tiered loyalty programs tend to work better for businesses that require a higher commitment such as insurance, hospitality, or travel. If your customer-base primarily purchases small items, then a tiered system might actually discourage them, as the next level could seem unreachable.

VIP Status

Although getting customers to pay upfront for future privileges can be a difficult sell, ecommerce juggernaut Amazon.com has shown that it’s certainly possible. For seventy-nine dollars per year, Amazon Prime members receive free two day shipping on all items sold by Amazon, or select partners. Members also have access to Amazon’s streaming video service, and the ability to borrow one free Kindle book per month.

While a VIP rewards program is tempting from a business-perspective, you’ll want to make sure you have a truly worthwhile perk to offer customers before asking for their money. If you’re not offering a substantial service, you’ll risk being seen as taking advantage of your customers, or being out-of-touch.

Assessing the Effectiveness of your Rewards program

After implementing a customer loyalty program it’s imperative that you determining whether it has increased customer retention or satisfaction. There are actually many different ways to do this, especially with the recent rise of user-friendly business analytics software. Here are a few terms to help you understand how to measure a reward program’s success.

Customer Retention Rate

The customer retention rate is simply a measurement of how long customers stay with you. The whole point of a loyalty program is to increase the number of customers who stay with your business for an extended period. Measuring the difference in customer retention between program members and non-program members is one of the best ways to determine if your loyalty program is effective.

Customer Effort Score

The Customer Effort Score measures your business’ customer service based on actual experiences customers have had with your company. CES asks customers how much effort they had to put forth to solve a problem with the company. Loyalty programs that address expedited requests, such as Amazon Prime’s free shipping, will likely improve your business’ CES, and general perception.

Negative Churn

Churn is the measurement of how many customers leave your business overtime. Thus, negative churn is the measurement of customers who instead of leaving, upgrade their membership and purchase added services. Negative churn is an important metric to track while running a tiered loyalty program. In order to properly measure this, you’ll need to be able to attribute purchases to individual users or customers, and track the volume of purchasing over time. This is an area where analytics software can come in handy.

Net Promoter Score

Net Promoter Score (NPS) is a customer satisfaction metric derived from simple customer feedback. The most common form of NPS is the degree at which customers would recommend your company to others based on a scale from one to ten. The NPS is calculated by subtracting the percentage of detractors from the percentage of promoters. Scores can range from -100 to +100, and any positive score is considered good. You’ll need to partner with an outside survey firm, or run a customer survey in-house, to track this number, but adherents swear by it.

Mobile computing has given customers greater access to competing services, and increased their expectations for quick customer service. Companies can no longer depend on reliable, long-term customers without putting in extra effort. Loyalty programs are a great step in this direction, especially when implemented with a long-term strategy, and tools for analyzing customer data.

1 COMMENT

  1. Hi Cameron,
    How do you attribute the customer retention rate to the effectiveness of the loyalty points system? There are many other factors like branding (as with Starbucks for e.g), or discounts given for repeat purchases. Need advice to how to measure and justify whether to implement a points system or not.

    Thanks in advance.

    Emily

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