Loyalty programs are a powerful tool for engaging customers and guiding them to be more valuable for your brand. But that comes with a cost. Loyalty programs require a significant commitment of resources to launch and manage.
Whether you’re looking to build a loyalty program from scratch or already have one in market, you’ll want to know if your strategy will strike a profitable balance between benefits and costs before you make a commitment to your business and your customers. Our loyalty program calculator can help make sure your investment pays off.
Starting simple: A quick calculator.
If you’re getting challenged about the profitability of your program, you may not believe that the words ‘financial’ and ‘heart’ belong together in a sentence. That aside, a few questions are at the financial heart of a loyalty program:
- How much more value can I get from my program members than I get from them today?
- What value do I need to give them to capture that incremental opportunity?
- How much will it cost to deliver that value?
- For answers to 1,2, and 3, what combinations will give me a positive ROI?
Not to be too technical, but mathematically speaking, #4 is a region called “the sweet spot” where you’re receiving enough value back from customers to cover the cost of the benefits they receive and your costs to provide them.
Below is a simple calculator to see if your program willgenerate a positive return. If you don’t know some of these numbers, don’tworry – read on a bit further for some help.
What you’ll need:
- Your annual sales
- Your margin rate as a percent of sales
- An estimate of what share of your customers will enroll in your program
- What increase in value you estimate you’ll get from members
- The cost of rewards you’ll provide, as a percent of members’ sales
- The operating costs for your program
- The number of years you’d like to include in your model
You may have come here to get answers to these questions, not to get asked for them – particularly for numbers 3 and 4. Take a look at the bottom of the calculator. There are two numbers there that can help.
- The first tells you, for the amount of reward costs you’ve said you are going to give customers, how much increase in members’ value you need to see to have your program break even
- The second tells you, for the amount of increase you’ve entered, how much can you afford to give back in rewards
These will give you guardrails for your sweet spot. A simple calculator like this can’t tell you exactly where it is – but it can tell you where to look.
Going deeper: A more comprehensive tool
Other calculators we’ve seen stop at the limited view of what goes into a program’s ROI. We can offer something more complete for you to download. In this file, you can again start with as few as 7 inputs, like above. But there are additional optional inputs to give you a more detailed view.
Even with these, keep in mind that this is a simplified model. There are many financial and non-financial factors to consider for your program that aren’t captured here. But it’s a good starting point. You can calculate your incremental sales from loyalty members by year, the lift needed to break even, your time to break even, and a more detailed breakdown of both benefits and costs.
Get started with 7 inputs.
The file includes guideline values for the percent of customers who will be members of the program, and the rewards offered for companies in your vertical. The required inputs are:
- Your annual sales
- Your margin, as a percent of sales
- An estimated percentage of your customers who will be members of the program
- The value of the benefits you'll offer them
- An estimated cost to set up and launch your program
- An estimated cost to run the program ongoing
- The lift in members' spending for the program that you'd like to model
Optional inputs.
You can expand your model with optional inputs including:
- Your current loyalty program (if applicable)
- Baseline growth rates for your business
- Breakage and the net cost of program benefits to you
- Impact of the program on customer churn
Outputs.
See projections for your future revenue, costs, and ROI, over a period of 1 to 5 years.
Transparent calculations: Feel confident in the numbers you see with views of your current and future business.
Open to update. All of the inputs in the workbook are open for you to update. A simple protection has been put on the file to avoid accidental errors. We’re happy to unlock it for you, just submit a form a simple form to see the password.
What’s not included.
It’s important to know what you don’t have. We’ve included some factors that aren’t captured where you may want to go into deeper detail.
Get Help to Elevate Your Loyalty Strategy
At the risk of offending our fellow Excel lovers, some of the most important questions about your program can’t be answered in a spreadsheet. Questions like:
- Which customers do I need to target with my program?
- What would they consider valuable? How will they react to my offers?
- How do I spend my loyalty budget most efficiently?
- Do I need a program at all?
To find the answers to these questions and how to optimize your loyalty program to improve ROI— including using AI to create smarter lifecycle campaigns — book a free call with one of our loyalty strategists.
Kognitiv has over 80 years of experience building and running loyalty programs. Because we do both, our strategies are realistic and implementable, tailored to your needs and capabilities. We understand that your loyalty strategy needs to work in the real world, not just in spreadsheets. As much as we may love them.