Challenges in measuring Return on Loyalty
Accurately measuring the performance of your loyalty investment (what we call ‘Return on Loyalty®’) can be difficult. The most loyal customers, who are sometimes the most valuable, are not always the most profitable. For this reason, it’s important that we understand how to accurately measure the profit returned from customer loyalty and retention investments. There are challenges with being able to do this effectively, here we share the main ones:
1. Self-selection bias
This is the big loyalty program measurement challenge. It is a fact that the customers most likely to enroll in your program are those already most engaged with your brand, products or services.
This makes sense. They know they are going to benefit because they intend to keep buying from you, will be rewarded the most and are more likely to notice you have a program in the first place. So comparisons of sales, value or loyalty for members versus non-members do not necessarily measure program effectiveness.
Your members are more valuable than non-members, that is why they are in the program. They are not necessarily more valuable because of the program.
Self-selection bias makes program ROI measurement difficult, but it does not invalidate offering a program. Because if you do not have a good, competitive loyalty customer value proposition, customers may well self-select into your competitor’s program.
2. Control Groups
The techniques we use to measure campaign returns – where we hold-out a control group, attribute conversions to the campaign, measure sales lift against the control and report incremental margin achieved versus costs, to arrive at ROI for the campaign – are problematic; How do we apply these disciplines to multi-year customer retention targets? Especially if a loyalty program is part of your strategy.
Customers do not react well to being told “you cannot join this brilliant reward program because we need a control group and you’re in it”.
3. Share of Wallet
Analysis of loyalty program data is a useful way of understanding the value of your customers to you, but the critical missing insight is how that value compares to their entire wallet.
The data sharing economy (and perhaps coalition loyalty programs) are now unlocking new insights for brands – enabling you to look beyond your own view of the customer.
Some payment companies are opening up their data to help brands build a market-wide view of their customers’ behaviour, including (in certain circumstances) the ability to append external data at an individual customer level.
What’s the Solution?
Managing customer engagement should attract as much rigour as managing cashflow. Some of the techniques we use are:
- Before & After: This compares customer sales behaviour (categories purchased, average basket size, time between purchases etc.), at the individual customer level, for identical periods before and after enrolment to avoid any seasonal distortions.
- Statistical Pairing: This approach does compare members with non-members, but creates customer pairs which are matched on every available attribute, attempting to make program membership the only significant difference between the two. From this set of pairs it is possible to extrapolate differences in value and churn to the larger program membership, to determine ROI.
- Redeemers Vs Non-redeemers: For programs with a loyalty currency (e.g. points) that is accumulated by members and redeemed for rewards, there is almost always a portion of members who qualify for a reward, but because they are not engaged or influenced by the program they do not redeem. Contrasting the behaviour of Redeemers with Non-Redeemers provides a measure of program effectiveness, though this is a conservative measure of return.
- Share of Category: Access to secure external data helps compare program investments to changes in the market or category share of the program owner. Being able to accurately measure current levels of loyalty (internal view), with the additional share of wallet perspective (external view), provides critical insight for marketers to best direct customer investments. For example; which customer segments are most at risk? Where will I get the best ROI from directing marketing resources?
Ellipsis understand that measuring loyalty and retention program ROI can be difficult. Return on Loyalty® is a powerful new way to accurately measure incremental benefits produced by your customer investments and guide better decision making. If we can help, please call.