How to Evaluate the Retail Loyalty Program's Performance?

1. What is a retail loyalty program?

2. How does a loyalty program work?

3. What is the purpose of the customer loyalty programs?

4. Why are loyalty programs important?

5. Types of customer loyalty programs

6. How to evaluate the loyalty program's effectiveness?

What is a Customer Loyalty Program?

Loyalty programs are special offers of discounts, rewards, and bonuses to attract and retain customers. Retailers offer additional rewards to customers and encourage them to make repeat purchases. These rewards are given for customer loyalty to the store/brand ("loyalty programs" takes its name from here). Commonly, the more often a customer shops at a retailer - and the more they spend - the greater their rewards.

Loyalty programs benefit retailers not only by increasing customer loyalty but also by providing important information to stores about how customers spend and which products and offers are most attractive.

Some retailers use loyalty programs, while others introduce annual loyalty club memberships.

How Does a Loyalty Program Work?

Loyalty program incentives can range from early access to sales, and member-only discounts to free merchandise or special services such as free shipping.

In order to join a loyalty program, customers usually register their personal information with the company and receive a unique identifier or loyalty card (bonus card). They use this card or a special code when they make purchases But first of all, the retailer must choose an appropriate loyalty system. This depends on the marketing budget, size of the target audience, market share, and other factors.

The Purpose of a Loyalty Program

Retail loyalty programs fulfill two key functions: acquiring information about customers and increasing sales. Through loyalty programs, a company rewards customers for their continued loyalty. Also, using a loyalty program provides additional information about the product categories that customers buy together, as well as the shopping habits, behaviors, and preferences of loyal customers.

Loyalty programs help retailers increase sales. This is because loyal customers spend more. The longer a customer stays with you, the more opportunities you have to gain their trust. Loyal customers spend on average 31% more than new customers.

Why are Loyalty Programs Important?

An effective loyalty program helps store chains:

• Motivate customers to make repeat purchases and increase loyalty to the retailer. 

• Increase sales. Loyal customers will be more likely to buy in their favorite store where they have the most comfortable shopping experience.

• Increase the average check. Loyalty program customers benefit more from shopping in a store where they get bonuses on each purchase. Therefore, they will buy more often. 

• Increase brand awareness. By receiving bonuses and rewards, happy customers will share their positive shopping experiences with their friends and family. This way, more people will learn about the store itself and the loyalty program.

Also, effective loyalty programs increase repeat purchases. Discounts, bonuses, and other rewards encourage existing customers to repeat visits and purchases.

Types of Loyalty Programs

There are four main types of loyalty programs.

Discount Program

When a customer makes a purchase, he gets a discount card. The greater the amount of all purchases, the greater the discount. Such programs are used by major cosmetic retailers. For example, Sephora with its Beauty Insider rewards program. The loyalty program offers a fixed discount of 5-10% of the purchase price. This model is the easiest to implement, so it's often used by smaller stores.

Tiered Loyalty Program (multi-level)

Multi-level loyalty programs have rewards divided into different levels. At each level, the customer receives a particular discount or cashback on purchases. And more incentives and discounts are offered to customers at higher program levels. All in order to motivate clients to spend more and reach higher levels for more rewards.

Bonus or Cashback Loyalty Program

It provides a refund of some of the money spent on a purchase. So, with the help of cashback, you can partially or completely pay for the purchase, provided that you have the necessary amount.  A bonus loyalty system is often used by large retail chains. Customers receive bonuses for purchases, reposts on social networks, reviews, or other favorable actions for the chain.

Bonus programs allow customers to accumulate points that they can exchange for gifts and discounts. Sometimes stores offer to convert bonuses into branded products or other available merchandise.

How to Evaluate the Effectiveness of a Loyalty Program?

For an overall evaluation, it is important to track the number of clients of the loyalty program in dynamics. It is necessary to understand whether the loyalty program is popular or not. And at the same time monitor the revenue, so that to avoid situations when the number of loyalty program customers is growing, but they are not active and do not buy anything. 

The effectiveness of the loyalty program can also be assessed by the NPS (Net Promoter Score) or customer loyalty index - a measure of reputation, an assessment of customer loyalty to the company, product, or service. The NPS index research is carried out in the form of a survey. Usually, clients are offered one question in which they have to rate the probability that they would recommend a store or product to friends and family. In order to properly calculate the customer loyalty index, the selection of customers must be random and representative.

How Does a Retailer Calculate Customer Loyalty Value? 

LTV (Lifetime Value) or CLV (Customer Lifetime Value)

Customer Lifetime Value (LTV, CLV) shows the profit that customers will bring in over the entire time they interact with a brand or company. 

For businesses, this indicator is critical for evaluating the quality of a loyalty program. As a rule, a customer's first purchase does not cover the retailer's marketing costs. In order to recoup the investment, the customer has to keep interacting with the store, make repeat purchases and stay loyal. 

A simple way to calculate LTV (CLV) is to subtract the cost of customer acquisition and service from the revenue the store received from customers.

Use this formula to calculate LTV:

So, if you earned $400 from a customer and spent $240 to attract and serve that customer, that customer's value is $160.

However, this is a very simplistic view of the LTV metric and it becomes problematic when you calculate the metric for entire customer groups or segments. The problem is that customers don't buy the same way, spending different amounts in your store.  Also, some customers buy consistently, while others buy very infrequently.

Lifetime value is the average value of a customer's check multiplied by the number of purchases (transactions), which is then multiplied by the average duration of the customer's interaction with the store.

So, let's calculate the value of a customer who buys for 2 years and has made 50 purchases at your store with an average check of $10:

Another way to measure the effectiveness of loyalty programs is to multiply the LTV value by the profit margin. This method allows you to accurately determine the value of each customer.

Retail Loyalty Program Effectiveness

A successful loyalty program means that customers find value in it. The retailer has to track the effectiveness of the programs over time in order to measure the success of the loyalty programs and make sure that it converts enough customers and generates profit. 

Tracking real-time data on customers, merchandise and profits helps make decisions and make strategic planning for customer loyalty programs. The Loyalty Program Effectiveness report on the Datawiz BES platform summarizes key loyalty program metrics and shows their share of total chain sales. Analyze loyalty programs, track sales, and predict results!