Measuring Loyalty ROI in Retail

Mar 27, 2015

Measuring Loyalty ROI in RetailInvesting in retail loyalty is a major decision for any company, no matter the size. Loyalty impacts every facet of the organization and requires a potentially massive investment of time and resources. It is not a one-time project, but an ongoing commitment that requires constant nurturing and care.

More importantly, a loyalty program is not something that an organization can come in and out of. Once the commitment is made to a loyalty program, it will be difficult and costly to walk away from it. As a result, the decision to launch and focus on a loyalty program should not be made lightly. Making a decision like this requires significant due diligence, research, and an organizational belief in a positive ROI over time. Forecasting and measuring that ROI is increasingly falling to the marketing department, but it also must be created and managed in partnership with the finance team.

The ROI model needs to be simple, clear, and measurable. There are three basic, key components involved in creating a retail loyalty ROI model:

  1. Incremental sales driven by the program
  2. Initial capital and expense investment
  3. Ongoing costs of delivering the program

Here we examine incremental sales and address other components in our Retail Loyalty Readiness Worksheet post.

Incremental customer behaviors driven by loyalty programs include increased trips, bigger basket size, increased cross-channel shopping, etc. All of these behaviors drive towards one key metric – incremental sales per customer in the program versus those not in the program.

Forecasting and measuring incremental sales from retail loyalty programs is perhaps the most challenging and debated component of calculating a loyalty program’s ROI. Marketing folks tend to inherently believe that loyalty programs drive long term “customer engagement,” “brand halo effects,” and “inherent value,” but the finance team cringes at every one of those expressions. They want to see a clear, measurable way to calculate the direct incremental sales driven from the investment in loyalty. Simply being able to demonstrate a break even can be effective for getting everyone’s buy in. The rest can be proved over time.

Methods of Pre-Launch Testing

In the ideal scenario, incremental customer behaviors are carefully tested and measured before a full chain-wide launch. There are several ways to do this, with pros and cons to each.

First, the program can be direct marketed only to a sub-section of customers and incremental sales can be measured versus non-loyalty customers who have similar profiles over a period of time. This is somewhat limiting as you are not able to measure the potential incremental impact of mass and store marketing. However, if you can prove a break even without it – all the easier to sell internally.

A second way to test incremental sales pre-launch is by isolating a market and only launching the program in that market. Over a period of time, ideally at least 6 months, you can measure incremental sales against a “like” market. The challenge here is in identifying the like markets and truly isolating the variable of the impact of the loyalty program. But again, if you can prove enough incremental sales to at least drive a break even, you stand a chance of getting a full launch approved. Both scenarios carry an inherent risk of frustrating customers not included in the test, but that can be managed.

Methods of Post-Launch Testing

What if you are trying to measure the impact of a program that has already launched without an agreed upon ROI? Or what if senior management does not have the time or patience for a lengthy test to prove it out? It gets a bit messier but there are a few ways to approach this scenario.

The easiest way is to simply take the number of new contactable customers attributable to the loyalty program and add up their incremental sales directly measured from direct marketing programs like email and direct mail. This works well for retailers that already had a solid CRM program in place before loyalty.

For example, imagine a retailer was sending 5 million direct mail pieces and 50 million emails per year before loyalty. Let’s say they were measuring incremental sales per customer contacted of $1 per direct mail campaign and $0.20 per email campaign (measured by test versus control). The retailer then launched a loyalty program and added 2 million contactable direct mail households and 20 million emails. Assuming the new names performed the same (and they should, perhaps even better since they self-selected), you can expect $2 million more in incremental sales from direct mail and $400,000 more from email campaigns per year. Again, you know there are significantly more financial benefits to loyalty than this, but this is a simple, quick way to convince the finance team that you can at least break even.

If CRM is not an already well-developed function at the retailer, another way to measure incremental sales from loyalty is to “force” a control group. Basically, you look back in time for “like” customers before launching loyalty. “Like” will be defined by whatever you have in the database – trips, sales, categories, basket, or even demographics. You can then measure pre versus post behavior of those who joined the loyalty program and those who did not, taking credit for any incremental sales.

It’s not ideal as it doesn’t totally isolate loyalty – customers who sign up for the program might have been about to become more loyal anyway – but again, it provides directional incremental sales. This methodology requires the retailer to have a customer database pre-loyalty launch, but these days most do.

Keep in mind that all methodologies for measuring incremental sales are attempting to truly only attribute revenue driven by the loyalty program and therefore need some way to isolate for that versus all other factors that may drive sales. None of the above approaches are perfect, but they can provide a starting point to get to a common ground for defining how to measure incremental sales and getting your finance team on board.

Lastly, forecasting incremental sales is only the first step. Once the forecast has been set, develop KPIs against it and share results broadly and regularly. Once the loyalty program is up and running, many other incremental behaviors can be reported on that will increase support for the program (such as engagement, net promoter scores, cross-channel behaviors, etc.). However, these metrics should never take away from reporting on the core incremental sales model that proved out the investment in the first place.