Loyalty programs are widely recognized across the business world, from hospitality to retail, as a critical customer-engagement tool. Consumers expect these programs—47% of restaurant guests belong to at least one—and brands benefit from the resulting customer relationships and data collection. But for all of this enthusiasm about loyalty programs, few brands can assign a dollar value to their efforts.
Paytronix has leveraged its 20 years of data and experience in the loyalty space to devise a simple method for calculating the value of a given brand’s loyalty program. By using some basic assumptions and the calculations outlined in this article, the monetary value of a brand’s loyalty program can easily be determined.
Through conducting analyses for dozens of brands and millions of individual consumers, Paytronix has found that most loyalty programs consistently boost visits and spend by 18–30% per enrolled member.
Based on this assumption, the following formula can be used to find the ROI from a loyalty program:
To arrive at the incremental sales from loyalty, first use the loyalty database to determine the average number of yearly visits and the average spend per visit for all active members of the loyalty program. Active, in this example, means any guest who has visited at least once in the last year. Multiply these figures to find the average annual spend of a loyalty member.
Once retailers have an idea of what loyalty members are spending annually, it’s time to establish how much of that is attributable to loyalty. Using the assumption mentioned previously—that loyalty members typically spend 18–30% more than non-loyalty guests—retailers can make a reasonable guess. A conservative estimate would attribute 18% of the annual spend to the loyalty program, while a more generous one would put that figure at 30%.
Take that percentage and multiply it by the average annual spend among active users. In other words, if the average loyalty guest spent $100 per year and the retailer assumes an 18% increase, the incremental spend would be $18. Multiply $18 by the number of active users in the program to get a sense of what portion of the brand’s annual sales are attributable to loyalty.
Next, consider the brand’s cost for running the program. This should take into account the cost of providing rewards to members and the redemption rate of those rewards. If a $5 reward that costs the brand just $1 is given to 50,000 members and redeemed at a rate of 50%, the cost to the brand would be 50,000 x 50% x $1 = $25,000. Calculate the cost of all redeemed rewards in a given year and add it to the cost of operating the program itself.
Once a retailer has both the incremental sales from the program and the cost of running it, they can follow the above formula to find the program’s ROI.
Understanding the monetary value and ROI of a loyalty program can go a long way in shaping overall business strategy and budget. Once retailers know how their brand’s program is performing, they can identify areas for improvement and determine whether to experiment with new campaigns, richer rewards, novel enrollment methods or even different forms of guest engagement.
Want to learn more about boosting your program’s performance? Contact Paytronix by calling 617-649-3300, ext. 5, or visit www.paytronix.com.
This post is sponsored by Paytronix