As we begin a new calendar year and, for many retailers, as a new budget year approaches, it’s a good time for a loyalty audit. Stepping back to take the pulse of your loyalty initiative lets you gauge its health and take proactive action to remedy any weak points before it’s too late.
Too often, loyalty programs run on autopilot for years. When loyalty directors and managers are solely occupied with the daily tasks of keeping the program going, they may fail to assess whether the program is actually running well and meeting its objectives at an optimal level.
In this blog, I’ll review six essential metrics that will help you evaluate your program and identify potential weaknesses — which can guide you toward opportunities for improvement.
Why audit your loyalty machine?
According to KPMG’s Global Consumer Executive Top of Mind survey,1 90 percent of retail CEOs are concerned about customer loyalty — yet only 24 percent rate customer loyalty as a top 10 priority. For many organizations, this seems to indicate a mindset of “if it doesn’t seem to be broken, don’t fix it.”
However, after designing and implementing retail loyalty programs for 30 years — from major U.S. department stores to pure e-commerce retailers to specialty retailers — I’ve come to think of loyalty programs as machines. And machines need to be continually maintained in order to optimally deliver upon the above objectives.
The return can be big. According to Trading Economics’ United States Retail Sales YOY 1993-2016 statistics,2 85 percent of growth came from loyal customers. Most retailers have come to understand that the best loyalty programs deliver rich data that can generate insights that inform the actions of the entire organization (not just marketing).
Thinking of your loyalty program as a machine also helps you think more logically about how the program is working as a whole, as well as how the individual mechanisms are performing. When asked to conduct a loyalty audit and relaunch a program, I specifically check to see whether the company’s loyalty program is designed to properly manage two essential functions:
- Motivate customers to consolidate their category purchases with that retailer
- Provide a construct for that retailer to collect customer data
The following metrics will help you evaluate these two critical aspects and alert you to potential weaknesses in your loyalty program, so you can start repairs.
1. Loyalty Program Penetration
The first essential metric in your loyalty audit is determining what percentage of overall transactions is represented by loyalty member transactions. For most retailers, a major objective of their loyalty program (if not THE major objective of their program) is to collect and track transactional data at the customer level. To this end, we want a view into the buying behavior of as many program members as possible. And at the customer level, we want them to be motivated to identify themselves at the point of sale on every transaction, so we have a complete understanding of their buying behavior.
If you are not already doing so, you should be monitoring this metric in your dashboard.
Calculating Loyalty Program Penetration
Unless a retailer has a very specific objective to use their program to target only a small subset of customers, the higher the penetration percentage the better. Obviously, a new program will have a lower penetration as it ramps up. A mature program that has been in the field for three or more years should, at a bare minimum, be pushing above 50 percent. Best in class programs push 90 percent and above.
If your program penetration is lower than 50 percent, you definitely have issues. If it’s between 50 and 65 percent, you have a moderate program with room for improvement. A declining penetration over time is most definitely a cause for alarm and action needs to be taken.
2. Rewards Redemption
According to a 2016 KPMG survey of 700 consumers,3 two-thirds of respondents indicated they had made a special shopping trip in the last six months to earn a loyalty program reward. Sixty percent of respondents indicated that they would shop at a retailer with slightly higher prices in order to earn a reward.
Most retailers have found that a rewards redemption shopping trip is an incremental one — the holy grail of loyalty. Therefore, rewards redemption is one of the best metrics to track when auditing loyalty programs.
Most retail loyalty programs are constructed with a primary value proposition. For example, it may be to spend $100 and earn a $5 reward. In addition to this primary value proposition are secondary benefits — like a $10 birthday reward, members-only sale events, etc. Most retailers track primary benefit redemption closely since it is a balance sheet item, but all other redemption of benefits should be monitored as well.
There are two ways to look at rewards redemption. The most common is to look at the percentage of redemption as it relates to the number of rewards issued. For example, you issued 100 rewards certificates and 60 of them were redeemed — meaning you have a 60 percent redemption rate and a 40 percent breakage rate.
Calculating Rewards Redemption
Often retailers make the mistake of comparing this issued rewards redemption percentage with other promotions. The issue with this type of thinking is that loyalty rewards go to your best, top-spending customers. Unless you have a high percentage of customers who make a single, high-ticket purchase, you should expect rewards redemption to be higher than your average promotion redemption rate.
To compare apples to apples, you need to calculate the average general promotion redemption rate among this same group of best customers. Then compare this metric to your primary value proposition rewards redemption (along with secondary benefits redemption rates). This gives you a sense of whether customers are truly motivated by your rewards.
3. Percentage of Earning Members
Simply put, this is the percentage of members who earned a reward. For example, of 100 loyalty members, 27 of them earned a reward, so the program has 27 percent earning members.
Calculating Percentage of Earning Members
Generally, you want to see an earning members percentage between 25 to 40 percent of total members. Under 25 percent may indicate that it is too difficult to earn a reward for the vast majority of members. This will result in poor member engagement, which means less customer data collected, fewer members consolidating their category purchases with you and less revenue impact resulting from the program.
If your loyalty audit reveals an earning members percentage over 40 percent, that could indicate the program’s primary value proposition is too easy to reach. This could indicate that the program is not stretching members to consolidate category purchases and make incremental visits. In other words, it’s rewarding members for behavior they would have exhibited anyway. This is dangerous in low-threshold, high-funding-rate situations. That said, some programs are intentionally built with a lower spending threshold, but also a lower funding rate of the primary value proposition to engage the greatest number of customers. Often a retailer can pull off lower funding rates if they deliver rewards in real time.
This all goes to underscore the need to carefully design loyalty programs through solid financial modelling. If you inherited a program, as most loyalty directors do, do not assume that a proper financial model was used to justify the program prior to its launch. Many, many loyalty programs were created with thresholds and funding rates that were based on what competitors were doing at the time and not on solid financial modelling.
4. Active Participation
According to COLLOQUY’s annual Loyalty Census,4 an average of 54 percent of loyalty program members are inactive. The other 46 percent of members are actively engaged to varying degrees. By measuring customer awareness, understanding and participation in your program (via an ongoing survey), you will get a better sense of the degree of customer program engagement. Are they nominally aware, but don’t understand the program? Or are they very aware of how the program works and are “working” the program to earn rewards?
Understanding active participation as part of your loyalty appraisal has the added benefit of helping you better respond to your CEO when she asks, “Are we just rewarding customers for shopping they would normally do anyway?”
Understanding the active participation level of your loyalty member base can be a very powerful tool when measured over time or when comparing to competitors. To this end, CCG developed the Active Participation QuotientTM (APQ) more than a decade ago. APQ allows retailers to understand impacts to their loyalty initiative — like a major program re-launch, new competitive pressures or evolving loyalty member demographics. Retailers can also measure APQ by particular customer segments as well as compare how well they are performing as versus other retailers in their category. APQ is one of the many metrics included in CCG’s quick and cost-effective Loyalty Program Effectiveness Appraisal.
5. Program Impact on Motivation to Spend
Another great metric to have your arms around is your program’s impact on your customers’ motivation to spend. Here, you want to understand impact of the program as a whole, as well as on your primary value proposition and each of your secondary benefits. Determining this may come in the form of a survey. Another option is to utilize CCG’s Loyalty Program Effectiveness Appraisal, which will also calculate your program’s APQ and other key metrics, like Enrollment QuotientTM (which represents your program’s appeal at enrollment).
6. Program Appeal at Enrollment
Here, you want to gauge your program’s appeal to potential members and their degree of belief — before joining — that the program will benefit them. Again, this can be analyzed by adding appropriate questions to an ongoing survey. If your loyalty appraisal reveals that program appeal at enrollment is declining over time, that could signify your program is not as attractive to new members as it should be. This could be the result of your competition, changing customer demographics or other factors.
Featured CCG Service
Get the metrics to answer your CEO’s most pressing questions.
Can you quantify the impact of your loyalty program? Do you know how your program performance compares to other retailers? Get the answers before your CEO asks you!
CCG’s Loyalty Program Effectiveness Appraisal is an objective, third-party report that you can take to your CEO and Board to answer questions like these:
- How does my program’s performance compare to other retailers?
- Are our loyalty members really engaged in our program?
- Is the program really driving incremental spending, or are we just rewarding customers who would have shopped us anyway?
- What loyalty benefits are actually driving customer spend — and which ones aren’t?
What You Get
CCG’s Effectiveness Appraisal is based on data we’ve collected over more than three decades working with more than 75 of the top retailers in North America. It takes less than one hour of your time to provide initial input. In two weeks, you’ll receive your customized scorecard, with key metrics that include:
- Active Participation Quotient – measures your customers’ engagement in your loyalty program, based on their understanding of how the program works and their level of participation. A perfect APQ is 100. The retail norm is 48. How does your program rate?
- Motivation to Spend – rates your overall program and its top three benefits on the ability to motivate your customers to consolidate their spend in your category.
- Program Net Promoter Score – tracks member satisfaction and advocacy based on the likelihood of members to recommend your program.
- Customer Data View – provides a metric to measure the ultimate objective of most retail loyalty initiatives today: the degree to which your data collection efforts are providing a 360-degree view of your customers.
- Overall Program Rating – benchmarks your program as Challenged, Middle of the Pack or Best in Class. Also provides insights to help you improve your program.
The Loyalty Program Effectiveness Appraisal gives you a clear, unbiased tool for tracking your program’s performance year over year and after major program revisions. Get your report in time for your next CEO meeting.
Or call Sandra Gudat at (720) 208-0304 — and let’s get started!
Finetune Your Loyalty Machine
These six loyalty audit metrics, although essential, are not exhaustive and there are certainly other useful metrics that can help you evaluate your loyalty program. These six, however, are powerful metrics that can help you monitor and finetune the ongoing performance of your loyalty machine. This, in turn, can help you ensure it’s working at peak performance and delivering upon the primary objectives of promoting consolidation of purchases (and thereby producing incremental trips and sales) and collecting indispensable customer data.
If you need assistance performing a loyalty audit or turning the results of your appraisal into strategic action, our retail marketing consultants can help. Our CRM agency has more than 40 years of experience assisting retailers in creating and improving their loyalty programs to bolster long-term, profitable customer relationship. Click below to schedule a free consultation or call 800.525.0313.
- “Global Consumer Executive Top of Mind Survey 2016,” KPMG, https://home.kpmg/cn/en/home/insights/2016/06/seeking-customer-centricity-the-omni-business-model.html, accessed Jan. 15, 2019
- “United States Retail Sales YOY 1993-2016,” TradingEconomics.com, https://tradingeconomics.com/united-states/retail-sales-annual, accessed Jan. 15, 2019
- “Is it time to rethink loyalty?” KPMG survey, 2016, https://assets.kpmg/content/dam/kpmg/be/pdf/Markets/is-it-time-to-rethink-your-loyalty-program.pdf, accessed Jan. 15, 2019
- “2017 Colloquy Loyalty Census,” Loyalty.com, accessed Jan. 15, 2019