What factors to look at and how to calculate your ROI
So you’re looking to implement a loyalty program for your brand, but you’re not quite sure if it’s the right business move for you. You’re probably thinking: will it bring in enough money to cover the costs? Will it generate a good amount of income? Or am I tossing all my money into a pit in hopes of turning over a profit?
All brands are faced with this same set of questions, and you’ll be glad to know that there is an answer to all of them. It all comes back to what is commonly known as the ROI, or returns on investments.
An ROI is a performance measure used to evaluate the profitability of an investment. In simpler terms, it is an indicator of the money you’re bringing in through a particular business venture. In this case, you need to ask yourself if your loyalty program is worth the amount of money you are initially investing.
The traditional way to calculate the ROI is by taking the benefit (or return) of investment and dividing it by the cost of the investment. The result will be a percentage or ratio that can show you how well this venture is performing for your business. If it is successful, the ROI from a loyalty program is usually high.
When it comes to loyalty programs, measuring the ROI can be quite tricky. In fact, there are three key ideas you can use to measure your ROI:
- The frequency of your customer purchases.
- Their basket or cart size, which is the average amount they typically spend per transaction.
- Their “loyalty lifetime.”
There are other factors that can vary from business to business, but some aren’t so easy to measure, such as how much extra business has come in using social media shares only. The above three are guaranteed to remain measurable across all offline loyalty programs, as they are indicators of loyalty, satisfaction, retention, sales, and awareness.
Loyalty programs that work are loyalty programs that are working towards increasing these three variables at all times. Luckily, you can calculate this using one simple metric known as the customer lifetime value or CLTV.
You can do this using this simple formula:
Customer lifetime value = (Annual revenue per customer x customer relationship in years) – customer acquisition cost.
The next step is to calculate the loyalty program’s costs. Costs here can usually be split into three main categories, such as implementation costs, marketing costs, and loyalty award costs, under which exists several subcategories, such as digital marketing costs, development, or loyalty program maintenance.
Don’t forget to also calculate the cost of rewards and incentives that your brand offers its customers as part of the loyalty program.
It all seems like a lot, right? But have no fear: there’s another simple metric you can use here, known as the customer acquisition cost, or the CAC. In fact, you need it to calculate the CLTV per the formula above. You can get it using this simple formula:
Customer acquisition cost = Rewards and marketing costs for acquiring new customers / Number of new customers
In this case, setup costs for the loyalty program such as development and maintenance fall into the top category of the formula.
Now for the main event: calculating the ROI. Using the formula outlined above, you can simply divide the CLTV by the CAC, and there you have it, your ROI.
But how can I get all this data if my loyalty program is offline? Consider using our loyalty platform in other or any other that fits your business needs. Loyalty platforms that focus on converting offline sales will be your best bet in order to get accurate data on your investment.