You and your team have worked tirelessly to design and launch your loyalty program. But what’s next? How should you and your business track the success of your program? Once a loyalty program is in market, there are 5 main KPIs that you should track to monitor its overall health. While it’s important to note that determining the correct KPI measurement varies based on industry and purchase cycle, the key areas of focus remain the same.
#1 – Member Acquisition
Simply put, member acquisition is how many new members are joining your program over a defined period of time. This KPI is important because without hitting your membership targets, it can often be challenging to meet many of your overall financial goals. If you’re missing your member acquisition goals, it may be from:
Poor Acquisition Strategy: Or oftentimes, lack of acquisition strategy.
Solution: Develop a comprehensive plan that attracts members into the program at every touchpoint, such as paid media, in-store signage, strategic partnerships, at checkout / POS integrations, mentioning the program on products, etc.
Program is Difficult to Join: Most customers value a quick and easy process for joining a loyalty program, and any sticking points could mean the loss of a potential member.
Solution: Eliminate potential barriers by reducing the number of qualifications to join the program, such as spend thresholds or how much data should be volunteered when enrolling.
#2 – Member Lift in Spend
Your member lift in spend KPI is the percent increase in spend for active members versus non-members. Your loyalty program should increase overall member spend if you want to drive incremental revenue and increase profits. The two metrics you should track when calculating lift in spend are average trips and average transaction size. Lift in average trips examines how many more transactions your loyalty members take compared to your non-loyalty members. Average transaction size consists of how much your members are spending per transaction versus your non-members. If you’re not seeing a noticeable lift in spend from your members, there are three ways to isolate the problem:
Usage – members start buying on a recommended cadence based on product or service purchase cycle
Cross-sell – members start buying in additional categories within your brand portfolio
Upsell – members purchase premium (higher value or higher margin) products or services within a specific category
If you find you’re missing your lift in spend goals, it may be from:
Ineffective Communications: If you’re mass-blasting emails to members or not personalizing communications, your campaigns are likely lost in the fray.
Solution: Drive engagement by adding promotional offers to motivate more trips, usage, upsell and cross-sell through personalization. Focus on recommending a sale when you know the customer needs it versus when it is most convenient for your business. In addition, don’t be afraid to test and learn. Develop a communication strategy that motivates members to grow their spend by A/B testing different stretch offers.
Barriers to Buying: If there are any hurdles or inconvenience to purchase, customers are likely to walk away.
Solution: Your members should be able to purchase from you easily. Examine your business to see if a subscription model would be beneficial to drive frequency, and make sure your products and services are readily available and in-stock.
#3 – Reward Redemption Rate
Your reward redemption rate is the percent of your currency earned (i.e. points, vouchers, etc.) that are being redeemed. It’s important to have a healthy redemption rate because it showcases program engagement. Members who are actively redeeming within a loyalty program are more likely to spend more and have a lower churn. If you’re not hitting your ideal redemption rate, it may be an indicator of one of the following issues:
Members can’t achieve the reward: If reward values are too high, it makes it difficult for members to redeem.
Solution: Consider lowering the reward values of existing rewards and/or incorporating low reward items with a lower value to diversify reward offerings and drive program engagement.
Members don’t know they have an award: If members have earned a reward, but haven’t redeemed yet, they may not be aware of your program.
Solution: Inform members when they have enough points to redeem by sending notifications via email, text, website displays, at checkout or a combination of these channels. In addition to these proactive communications, consider personalizing the member home screen based on products the member is likely to redeem for. You could also place a tracker on the member home screen so they can know the exact actions they need to take in order to reach their next redemption milestone.
Members don’t want the reward that is offered to them: If your reward offering is unappealing for your members, you’ll see low redemption rates.
Solution: Consider conducting customer research to gauge interest in current reward offerings, as well as potential reward additions, like new partnership offers, experiential rewards, etc. Once you have a better understanding of what your members would like to see in the program and if the budget allows, adjust your reward mix to fit their needs – easier said than done, we know, but worth it.
Members don’t have time to use the reward: If rewards expire before members have the opportunity to use them, they may feel a lost opportunity or frustration.
Solution: Examine your expiration policy compared to redemption rates to consider adjusting any timing issues. Note, expirations can also be used to drive engagement – it’s all about finding the right balance between excitement, urgency and frustration.
#4 – Churn Reduction
Your churn rate is the percentage of “at-risk” members that you can save from leaving the program, and potentially your brand. It’s vital to know this KPI because it directly impacts your total company revenue. If you’re seeing high churn, it’s likely due to:
Lack of Churn Strategy: Utilizing demographic and behavioral variables to develop a churn model that understands and calculates the correlation and trends leading to customer churn can help you re-engage customers before they are forecasted to lapse. Once you have developed your model and segmented members based of predictive analytics, design a communication strategy that is personalized to the segmented members.
Solution: Consider including different personalized offers to incent re-engagement and remind lapsing members of what they are missing out on by not engaging. This could be campaigns around the perks and benefits of being a member or sunk cost triggers for losing the currency they’ve earned if you have an expiration policy. Acquiring a new customer can cost 5X more than retaining an existing customer so you want to make sure that your retention strategies are optimized based on predictive behavior and not reactive.
#5 – Incremental Margin
This KPI is the increase or decrease in profit [ (incremental revenue x margin) – program costs ]. This KPI is vital because it determines the overall health of your program. If your program is seeing negative returns, it’s not sustainable in the long run. Note, Year 1 of a loyalty program will likely indicate negative returns due to initial investments in start-up costs from technology investment, creative assets and other key program tools. However, subsequent years should see the program increase its profit. If you’re not seeing a positive incremental margin from your program by the end of year 2, it could be the result of a few things:
You may not be driving enough top line revenue: (See the Member Lift in Spend section) or you aren’t stopping a leaky bucket (See the Churn Reduction section).
Your program cost is too high: The amount you’re investing in rewards, tools or campaigns may be more costly than your customer base can return.
Solution: Boost incremental margin by lowering program operating costs, such as the cost of rewards fulfillment, benefits and marketing costs.
Your product or service margin is too low: This case is likely the hardest to correct and may also be an indicator that a loyalty program may not be the right strategy for your business.
Solution: Consider developing a loyalty program that provides consumer value outside of monetary rewards.
Bonus: Acquisition Quality
Of the members who join your program, the percentage that activate (make their first purchase) within their first purchase cycle is the acquisition quality. You want your customers to get in the habit of engaging early with the program; those who don’t activate within the first purchase cycle have a higher likelihood of lapsing out of the program. A strong acquisition quality demonstrates you’re attracting the right type of consumer into your program. The reasons you’re missing this KPI could be:
Acquisition: Loyalty programs should attract your best and most valuable customers. If you enroll all customers into the program, it may have a negative impact on your overall acquisition quality and could lead to negative financial results later. A high count in members won’t necessarily lead to a profitable program long-term.
Solution: Check your enrollment offer to make sure that it isn’t too rich and attracting “gamers” – members who enroll only for the initial welcome gift or just to see what they can get out of the program.
Onboarding: Develop the onboarding and activation campaigns that nurture members into the program and incent first purchase conversion.
Solution: Education and value are key in driving acquisition quality. Instruct members on how easy it is to get started. And consider giving them “early wins” to drive purchases and early program engagement.
To ensure the overall financial health of your program, it’s important to track and monitor the KPIs and develop corrective solutions. As we mentioned, determining the correct KPI measurement varies based on industry and purchase cycle, but these should be your main area of focus.