How do you weigh the costs of customer loyalty programs?

1 Define your goals

Before you launch or evaluate your loyalty program, you need to have a clear idea of what you want to achieve with it. What are your specific and measurable objectives? For example, do you want to increase customer retention, average order value, lifetime value, referrals, or satisfaction? How will you track and measure these outcomes? Having well-defined goals will help you align your loyalty program with your overall business strategy and customer experience.

2 Calculate your costs

The next step is to estimate how much your loyalty program will cost you. This includes both the direct and indirect costs of running the program. Direct costs are the tangible expenses that you incur when you offer rewards or benefits to your customers, such as discounts, free products, shipping, or services. Indirect costs are the intangible expenses that you incur when you design, implement, and manage the program, such as software, staff, marketing, or administration. You need to account for both types of costs to get a realistic picture of your loyalty program budget.

3 Estimate your benefits

Once you have calculated your costs, you need to estimate how much your loyalty program will benefit you. This includes both the financial and non-financial benefits that you expect to gain from your loyalty program. Financial benefits are the direct revenues that you generate from your loyalty program, such as increased sales, retention, or referrals. Non-financial benefits are the indirect outcomes that you achieve from your loyalty program, such as improved customer satisfaction, loyalty, or advocacy. You need to quantify both types of benefits to get a realistic picture of your loyalty program return.

4 Compare your costs and benefits

The final step is to compare your costs and benefits to determine if your loyalty program is worth it. One way to do this is to calculate your loyalty program ROI (return on investment), which is the ratio of your net benefits (benefits minus costs) to your costs. A positive ROI means that your loyalty program is profitable, while a negative ROI means that your loyalty program is losing money. Another way to do this is to calculate your loyalty program CLV (customer lifetime value), which is the present value of the future profits that you expect to earn from a loyal customer. A higher CLV means that your loyalty program is increasing the value of your customers, while a lower CLV means that your loyalty program is decreasing the value of your customers.

5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?