A loyalty rewards program is designed to promote repeat high value sales. It creates a type of marriage with your customer that aims to keep them from looking elsewhere. Consequently, if your customers are not seeing value in buying again or even enjoying the rewards, your program is likely failing at its objective.
Measuring customer loyalty is necessary to ensure that you are meeting your goals. Use different metrics to evaluate and adjust your program to ensure that you are growing a staunchly loyal customer base.
This post is concerned with the monitor and control of your loyalty program. Specifically, it discusses different ways of measuring your program's success and offers suggestions for optimization.
Repeat Purchase Rate (RPR)
The repeat purchase rate (RPR) is the percentage of customers that return to make another purchase. The RPR is a great measure of customer loyalty. This information is also useful from the perspective of reducing advertising costs and increasing your bottom line because research shows that repeat customers convert at 12 times the rate of new ones. See how to calculate the RPR below.
It is ideal if you already have a database of customers. Otherwise, your loyalty program will give you that opportunity to begin building one.
To calculate the RPR, establish the number of repeat buying customers, ie ones who purchased from you again. Divide that number by the total number of ALL customers in your database. Then multiply the result by 100 to arrive at the RPR expressed as a percentage.
BENCHMARK: 20% to 40% RPR is generally considered a good range. Consider this metric along with the average order value (below).
Average Order Value (AOV)
The Average Order Value (AOV) refers to how much in dollars customers spend on each order. Some nickname it the measure of 'customer love'. Retailers can benefit a lot by tracking and increasing this metric. For instance, the AOV allows you to see how well you offset customer acquisition costs. Specifically, increasing AOV reduces acquisition cost and therefore improves your return on investment (ROI) re marketing. This metric is ideally considered along with others like the repeat purchase rate / RPR (above). After all, what benefit is there of having high repeat purchases that are too low in value to justify your service? Within the context of the Covid19 pandemic during which time brick and mortar retail businesses worked fewer hours, increasing this metric is helpful in raising overall revenue.
All the same, the AOV is sometimes useful in evaluating how well your customers are spending on each order. Calculate this metric by dividing total revenue in dollars divided by the number of orders. The AOV is expressed as that dollar value.
NB. Also use the AOV for creating future success. For instance, if they can afford it, marketers may use the AOV as the base for establishing the value of rewards / reward points to offer advocating customers for referring friends. Ideally however, offer this reward to new referred customers only AFTER they have made purchases to ensure that you break even. In other words, the AOV will not only be the reward but also the minimum value of a new customer's purchases required for earning the rewards.
Redemption Rates (RR) for Loyalty Rewards Programs
The redemption rate for a loyalty reward program is the percent of points that have been redeemed for rewards, ie out of all those that had ever been previously earned. See the formula below. The score for 'total points spent' should include ALL points redeemed since the program's launch. That number must be divided by the total of ALL points ever issued since the program's launch, even those that expired. Then multiply the result by 100 to arrive at a percentage.
Example:
Redemption rate = (15,700 points redeemed aka spent / 103,000 points ever issued, including expired points) X 100 = 15.24%.
BENCHMARK: The average redemption rate for loyalty rewards programs vary around 14% to 20% and above. If yours is lower, consider making improvements.
Average Customer Lifetime Value (CLV) of Loyalty members
An effective loyalty rewards program should boast an average customer lifetime value (CLV) that is higher for loyalty members, ie over the CLV of non members.If you have the wherewithal, I would suggest running statistical analyses that compare independent groups like T-tests (for 2 groups) or ANOVA (for 3 or more groups). Although a group will invariably have a higher CLV than another, eyeballing differences is not always useful because such differences are not always to a statistical degree and therefore may not always warrant attention. For help with this, write me, referencing this post and specifying that you need to statistically compare groups.
A statistically higher member CLV suggests that the current program is performing well and deserving of further investment. Otherwise, the program may be based on an outdated approach and need to be redesigned to better adapt to modern consumers.
Active Engagement Rate (within the loyalty rewards program)
As previously discussed, including engagement in loyalty rewards programs has been shown to engender more meaningful loyalty than the old 'earn & burn' purchases-only based loyalty program. The active engagement rate (AER) indicates how many customers are not only participating but 'actively engaged' with your loyalty program. Engagement relates to non-purchasing activities like referring friends and using social media to review your products, comment on your posts and so on.To calculate this metric; divide the number of customers who engaged within a period over the total number of customers within the program. To express the result as a percentage, multiply by 100.
Redemption Cycle Time
This metric refers to the amount of time it takes for customers to move from earning to redeeming awards. The rewards must appear attainable.
To calculate this, consider using a calender calculator. Calculate the number of days between the first awarded rewards and first redemption.
To calculate this, consider using a calender calculator. Calculate the number of days between the first awarded rewards and first redemption.
Redemption Cycle = Date of redemption - Date of first awarded reward(s)
BENCHMARK: Your high-value customers should be able to redeem a reward within 3 to 6 months. However, your next most valuable tier should be able to redeem within 6 to 9 months.
DO's & DON'TS
- Analyze how well your rewards catalog has been curated.
- Implement monitor and control systems for your loyalty rewards program, not only as a whole but also its components, like the in-built referral program, free shipping and other forms of subscriptions and so on.
Example: Implement some form of data collection. The ideal for those with a sufficiently large budget is to integrate a CRM with the point of sale that tracks all data required to run the analyses.
- To increase the average order value;
establish minimum purchase thresholds that qualify customers to enjoy desirable benefits.
Example. Free shipping on orders over $100
offer volume discounts.
Example. Get $3 off if you spend $30.
offer product bundle.
Example. Rather than buy only product x, also buy products y and z for an overall lower price of $105.
cross sell.
Example. With that hair brush, you can also get a bag that was custom made to hold it perfectly.
- To improve a low repeat purchase rate (RPR);
Make the program as appealing as possible with multiple ways to earn points and redeem rewards. Also see how to adapt your program can adapt to modern consumer, how to enjoy the advantage of a tiered program and how to design a program so you give more to higher value customers and do not break the bank.
For instance, beyond rewarding for transactions. also reward customers for engagement, interactions, social sharing, health or other goals related to your brand's core values.
- Provide cues that remind customers to redeem their rewards. Cues may include visual reminders on your website or brick and mortar store. Cues may also include verbal reminders at checkout or other points of contact.
Encourage frequent participation. The earning rate and frequency of participation in general have been shown to relate to a customer's redemption rate.
Example: Send messages to customers who have been inactive over an extended period.
- Just as you would with new or pre-existing products, promote your loyalty rewards program. Ensure its memory is alive and well in the minds of your customers.
- Make the process clear and easy to follow. Get tips on how to make an explainer page.
- Ensure that rewards have perceived value. Some examples include the following.
- Personalize rewards as much as possible. In fact, this was the single most desirable factor identified in one research study (by Wells Fargo. 77% surveyed consumers agreed).
- Allow customers to select their rewards whenever possible. This is why I personally like the idea of having a rewards catalog.
- Collaborate with other complementary brands to create rewards. Ensure collaborating brands share your core values and honor your target market's lifestyle. (Wells Fargo found that 70% of consumers agreed with this).
- Offer rewards that are exclusive.
- Remind customers of their total available rewards. Ideally, use email services that integrate with your points database to automatically insert the total points within the body of emails.
- Reward customers for mentioning their redemption over social media. By rewarding evangelists, you also motivate them to resume the process of earning points.
- Conduct market research on your program to get customer feedback that can inform how you can improve your program.
- Recognize that, outside of your efforts, many other variables impact on the redemption rate. They may include industry, location, ease of redemption, program awareness, the perceived value of rewards and the age of your loyalty program.
CONTENT RELATED TO MEASURING THE SUCCESS OF THE LOYALTY REWARDS PROGRAMS
- Why the old 'earn and burn' loyalty program model is failing and a new approach for modern consumers.
- Tiered loyalty programs
- Use spend-based loyalty rewards programs to give greater rewards to customers with the highest customer lifetime value (CLV) ... and reduce costs while you are at it.
- A great loyalty rewards program can not help your business if customers can not understand it sufficiently well to sign up. Create a loyalty rewards program explainer page.
- Incorporate a referral program into your loyalty rewards program. These 2 types of program complement each other. While the loyalty rewards program seeks to retain customers, referral programs seek to acquire new customers.
- Analyze how well your rewards catalog has been curated.
