Measuring Customer Loyalty and Engagement

Use these key customer loyalty metrics to audit your program, identify areas for improvement and set your program up for success.

Customer Loyalty and Engagement

Article Highlights

  • Assessing customer loyalty metrics lets you gauge the health of your loyalty program
  • A loyalty program audit can help you spot potential weaknesses so you can start repairs
  • Failure to communicate appropriately is one of several indicators that your loyalty program is losing momentum
  • Measuring customer engagement is crucial to measuring customer loyalty

As we begin a new calendar year and, for many retailers, a revamped budget, it’s a good time for measuring customer engagement and loyalty with 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 and measure your customer loyalty program and identify potential weaknesses — which can guide you toward opportunities for improvement. I’ll also share some of the most common reasons for declining loyalty programs and how to fix them. And I’ll explain why measuring customer engagement is necessary for measuring customer loyalty.

How do you drive customer loyalty? Start with an audit of your loyalty machine.

According to KPMG’s Global Consumer Executive Top of Mind survey,1 90% of retail CEOs are concerned about customer loyalty — yet only 24% 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. KPMG reports that in most mature brands, more than 85% of growth came from loyal customers.2 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 customer engagement 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 six metrics to include in your customer program audit 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 including this metric whenever you’re measuring customer loyalty and monitoring it in your dashboard.

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%. Best in class programs push 90% and above.

If your program penetration is lower than 50%, you definitely have issues. If it’s between 50% and 65%, 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 KPMG survey of 700 consumers,2 two-thirds of respondents indicated they had made a special shopping trip in the last six months to earn a loyalty program rewardSixty percent of respondents indicated that they would shop at a retailer with slightly higher prices in order to earn a reward.

Many retailers find that a rewards redemption shopping trip is an incremental one — the holy grail of loyalty. Therefore, rewards redemption is one of the best customer loyalty metrics to track when auditing loyalty programs and measuring customer engagement.

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% redemption rate and a 40% breakage rate.

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. If your redemption percentage begins to dip for a sustained period of time, this could mean you’re failing to engage your customers with your program benefits.

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% earning members.

Generally, you want your customer loyalty analysis to show an earning members percentage between 25% to 40% of total members. Under 25% 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%, 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 modeling and ongoing review of your loyalty program statistics. 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,3 an average of 54% of loyalty program members are inactive. The other 46% 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), a score derived by a given customer segment’s level of program awareness, understanding and participation in the program. I’ll go into more detail about this effective tool later in the article.

5. Program Impact on Motivation to Spend

Another great customer loyalty 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 Statistical Loyalty Program Optimization™, which quantifies the reach and desirability of existing and potential program benefits.

6. Program Appeal at Enrollment

For this aspect of measuring customer engagement, 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.

How does your loyalty program stand up to the competition? Spend five minutes with our interactive online assessment tool to find out — and identify strengths and opportunities for improvement.
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What is a good measure of a customer’s loyalty toward your store?

The six loyalty audit metrics above can be useful in helping you measure, monitor and finetune the ongoing performance of your loyalty machine. But sometimes, as you measure the health of your loyalty program, you just have a feeling that something isn’t right. There are a multitude of reasons why a loyalty program could be losing momentum. Here are some of the most common, plus customer engagement and loyalty program improvement strategies to get your loyalty program back on track.

Failure to Communicate Appropriately

Strangely enough, our customers don’t think about our loyalty programs all the time. I know, it’s shocking, right?! To get your program more top of mind, you need to be intentional about communicating it at every opportunity, even if that means simply incorporating a short blurb about the program’s basic value proposition.

  • Research conducted by the Edgell Knowledge Network (EKN) found that 81% of loyalty members do not know the benefits of the program in which they are participating.4 Further, they also were not aware of how or when they would receive rewards.

One executive from a 600-store chain I spoke with could not understand why overall program penetration was so low — it hovered around 20%. When we visited their stores, there was absolutely no signage or collateral about the program visible anywhere in the stores. That’s a classic mistake of attempting to “market by osmosis.”

Another common mistake is not proactively communicating rewards status or expecting customers to seek out that information on your website. Again, customers are busy, and it’s our job to keep the program top of mind. Keeping customers informed of their status keeps them more engaged and often is the key to promoting that incremental purchase when they know they’ll earn a new reward with that shopping trip.

Lastly, you could be over-communicating to the point that customers are tuning out or, worse, hitting the spam button. Often, loyalty members are the biggest group by far within the general email promotions list. If someone is not carefully coordinating all communications the member receives, you could be pushing them into overload and putting their finger on the spam or unsubscribe button.

Fix It

  • Perform an audit of all customer-facing communications to gauge whether and when customers are getting reminded of the loyalty program. Where possible, fill in the gaps.
  • Find opportunities to actively provide customers with their membership status in your 1:1 channels.
  • Map out all the communications that loyalty members receive from you from all sources. Is the organization overdoing it?

Failure to Continue Training Store Associates

With average associate turnover around 50% year-over-year, it’s no wonder that associate training on the loyalty program can fall by the wayside. The problem is, after the hoopla of the initial program launch, by the end of two years only one in four of your original (and trained) associates remains. By the end of seven years, you have nearly all new associates!

You say, “But we train our associates — there’s a whole section in their training manual on the loyalty program!” That may be true, but how much emphasis is the program getting with everything else they have to learn and the new things they have to do virtually every day?

Store associates are often “one-armed paper hangers,” as my 95-year-old Aunt Louise would say. If the store managers do not have at least one key performance indicator (KPI) relating to promoting the loyalty program, then your program just isn’t on the radar at the store level. And since store associates are the face of the retailer in general, and the loyalty program specifically, this may be a reason why a loyalty program is failing to perform.

Fix It

  • Build a cross-functional team with representatives from throughout the organization, particularly stores. Meet regularly with the team on your loyalty or rewards program.
  • If possible, lobby to have a loyalty program-related KPI included as part of store management evaluation.
  • Provide stores with positive feedback on the impact of their efforts to promote the rewards program and, in turn, show them how the program helps the stores.
  • Monitor loyalty member penetration at the store level and talk to high performing associates (to find and share what they’re doing), as well as the low performers (to diagnose what’s going on). Get these statistics on the company’s radar.
  • Consider a periodic “soft re-launch” of the program in the stores. This might include a new meeting leader’s guide, break room materials and perhaps a contest rewarding the stores with the best loyalty penetration (throw them a pizza party!) to revive store associate enthusiasm.

Failure to Engage and Motivate Customers with Your Program Value Proposition

This is a biggie. The two previous potential reasons for a program to lose momentum are relatively easy fixes. Failure to engage customers with your loyalty or rewards program hits the very foundation of the program and obviously is a reason why many loyalty programs fail.

The trouble could be something basic — for example, it may take too long to earn rewards — or something complex, like the program is difficult to understand or the benefits are not compelling anymore.

Whatever the exact cause, lack of engagement means it’s time for the organization to consider overhauling the program altogether because, at the most extreme end, it may be doing more harm than good by creating frustration among your more loyal customers.

Fix It

Selecting the right mix of member benefits for each of your audience segments is key to loyalty program development. And the best place to start is to go back to your customers. There’s no substitute for good qualitative and quantitative research.

As part of our own Voice of the Customer process, CCG’s unique Statistical Loyalty Program Optimization™ uses a series of models to help retailers define the optimal mix of benefits, while factoring in ROI, operational efficiency, support of brand drivers, and aspirational impact for non-members and lower tiers. To learn more, contact us for a free consultation. Schedule now

Brand Failure and Declining Loyalty Program Momentum

There’s another reason a loyalty or rewards program might be losing momentum: Brand failure. A loyalty program gives you a shot at setting the stage to build true loyalty. If it’s well-designed, it will motivate customers to consolidate purchases with you and help to build a pattern of shopping.

However, the brand itself needs to take it from there. If there are other systemic problems with product mix, operations, the website, the stores, etc., then you have a brand failure on your hands, and a loyalty program isn’t going to fix it. A loyalty rewards program that loses momentum in this situation is a symptom of much greater problems.

Fix It

Step back and review your brand and your store(s) as a whole, looking at the big picture beyond the loyalty program performance.

How do you measure customer loyalty?

As you can see, when loyalty program momentum slows down, it doesn’t have to spell disaster. With a loyalty program improvement plan, you can steer the ship back on course. And one of the most effective ways to do that is by measuring customer loyalty.

Sure, you may already be assessing whether customers have increased frequency of visits or dollars spent with you. You may be evaluating how much customer data you’re collecting. That’s all good. But if you aren’t also measuring customer engagement with your loyalty program, you aren’t getting a complete picture of customer loyalty.

Measuring Customer Loyalty by Measuring Customer Engagement

CCG’s proprietary Enrollment QuotientTM (EQ) and Active Participation QuotientTM (APQ) help fill in some important blanks when it comes to measuring customer engagement. They help you understand whether customers know about your program, if they find it appealing enough to join and whether they actively pursue rewards rather than passively enjoying the benefits without altering their behavior.

This kind of information can help you spot trouble brewing in your loyalty program, revitalize it before it’s too late and protect your margins by quantifying active member participation. These numbers provide an objective, third-party gauge that you can share with your CEO as one way to demonstrate your program’s health today and over time. That could help you win the budget to sustain or improve the program.

Quantifying Customer Engagement with EQ and APQ

EQ and APQ are created from proprietary formulas developed at CCG. They are based on surveys of actual retail consumers conducted over the past two decades. We’ve used these quotients to help retailers of all sorts — from major department stores to boutique shops — improve customer engagement.

EQ and APQ are two of the loyalty program statistics that should be included as part of a loyalty program audit, effectiveness appraisal or refresh. For instance, you may notice that enrollment numbers are dropping, reward redemptions are falling off or margins are getting squeezed. Naturally, you want to know why.

EQ and APQ can help you understand where you are today on some important program aspects. If either number is low, that’s a strong signal that you need to dig deeper into that area and make some changes.

These figures also provide fuel for valuable comparisons. You can, for instance, compare your results to the perfect score, the retail norm and your competitors. You can also compare scores within your different customer segments. And you can compare to your own scores over time by repeating the calculations on an annual basis or after implementing program improvements.

Track your program’s performance year over year and after major program revisions.

Can you quantify the impact of your loyalty program? Do you know how your program performance compares to other retailers? CCG’s Loyalty Program Effectiveness Appraisal is an objective, third-party report measuring customer engagement and loyalty 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?

CCG’s Effectiveness Appraisal is based on loyalty program statistics and other 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 customer loyalty metrics and insights to help you improve your program.

Measuring Customer Engagement at Enrollment

Enrollment Quotient is a foundational metric for measuring customer engagement. Essentially, it quantifies the effectiveness of your enrollment efforts by considering people who are not members of your loyalty program and gauging their interest level in joining. The graphic below shows specific points covered when calculating a store’s EQ score.

Perfect EQ score:

100%

Retail norm:

51%

Best in class:

70%

An EQ number that is low or declines over time indicates that your program appeal at enrollment is dropping and your program isn’t as attractive to new members as it should be. This could be the result of your competition, changing customer demographics, unappealing enrollment incentives, a program value proposition that’s difficult to understand or other factors. Additional research can help determine the underlying cause and guide you toward improvements.

Measuring Customer Engagement Through Active Participation

Active Participation Quotient measures customer engagement with your loyalty program based on awareness, understanding, participation and active management of their buying behavior to earn rewards and benefits from your program.

Yet even when program members redeem rewards, that doesn’t mean they are actively participating. Passive participants may gain rewards from your program without changing their visit or purchase behavior. In short, you reward them for actions they would take anyway and that don’t result in any benefit for your company.

APQ helps you determine what portion of your existing loyalty program members are truly making behavioral changes to earn rewards. The graphic below shows the points considered when calculating a store’s APQ score.

Perfect APQ score:

100%

Retail norm:

48%

Best in class:

66%

An APQ number that is low or declines over time indicates that your program isn’t maintaining member interest. This can happen when a program gets stale and members find it boring, or when your program doesn’t keep with the times and suffers in comparison to competitor programs. It can also reflect evolving loyalty member demographics and other factors.

Keep Measuring Customer Engagement and Loyalty to Improve Your Loyalty Machine

Auditing and measuring your customer loyalty program are important ways to help you quantify and measure customer engagement and loyalty today, after major changes, and year over year. This can help you identify weaknesses in time to strengthen them and set the stage for you to increase enrollment and motivate actual behavior change — leading to peak performance, increased customer loyalty and profitability.

If you need help performing a loyalty audit, measuring customer engagement 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 relationships. Click below to schedule a free consultation or call us today at 303.986.3000.

1 “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 Dec. 29, 2020

2 “Is it time to rethink loyalty programs?” KPMG, https://home.kpmg/content/dam/kpmg/be/pdf/Markets/is-it-time-to-rethink-your-loyalty-program.pdf, accessed Dec. 29, 2020

3 “2017 Colloquy Loyalty Census,” Loyalty.com, accessed Jan. 15, 2019

4 “Why don’t loyalty programs connect with consumers?” Tom Ryan, RetailWire, posted Jan. 21, 2013, https://retailwire.com/discussion/why-dont-loyalty-programs-connect-with-consumers/, accessed Jan. 11, 2021

Sandra Gudat

Author Sandra Gudat

Sandra Gudat is CCG’s president & CEO. Considered a pioneer in the field of customer marketing, she has a diverse background in consulting, database marketing, advertising, retail and business management. She is a frequent speaker on customer loyalty marketing and developing customer-centric policies

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