Editor’s note: This is part two in a series of articles on, “How to Measure the Success of Your Loyalty Program.” Read part one here.
The age-old standard for loyalty measurement is RFV—recency, frequency, and lifetime value. While these are indeed good metrics, they do not provide a complete picture of your loyalty program nor are they easily actionable. Of course, everyone wants more of all three, but they are lagging indicators and hard to move.
It’s time for an update. Loyalty metrics that matter must accurately capture Reach, Impact, and Cost. Reach is about how many of your customers are known to you and can be addressed with data-driven communication. We discussed here, in the first part of this series, why Revenue Capture Rate is a superior metric to loyalty signups for this purpose. Impact is next. While their Reach is top-notch, Starbucks, Chipotle, and Panera ultimately get so much credit for their loyalty programs because of their Impact on the bottom line.
Here, too, brands must go beyond vanity metrics like average check and average visit frequency. One of my personal pet peeves is when loyalty program operators pat themselves on the back because their loyalty program average check is higher than their non-loyalty average. This is selection bias, not Impact—of course, your top customers, who already spend more than your average customers, are more likely to join a loyalty program in the first place. There’s no evidence that loyalty drove this result. Successful loyalty measurement relies on a more thoughtful approach.
Check Out the Upcoming Webinar: "How to Measure the Health and Effectiveness of Your Loyalty Program"
When: 2 p.m. (eastern) on March 30
About: Presented by Emily Rugaber, VP of Marketing at Thanx and joined by other restaurant industry leaders. Measuring the health of your loyalty program is so much more than sign-ups and app downloads. The true value of a loyalty program must consider your program reach, your ability to impact the behavior of those you reach, and how costly it is to drive that change. Join us for a deep dive into why it's time to stop tracking vanity metrics and start tracking true performance.
At Thanx, we start with fundamental, and generally more actionable, Impact metrics: Activation, Engagement, and Retention. Activation is a measure of early customer lifecycle conversion. How many new guests are you turning into repeat customers, and are you getting better or worse at this over time? Engagement is a measure of active customers. In particular, are you able to use insights about different cohorts of customers to engage them with the right messaging to drive a desired behavior such as visiting more frequently, trying a new menu item, exploring a different daypart, bringing friends, etc.?
Retention is a measure of the longevity of your customer relationships. When do active customers stop returning and how can you delay or reverse that behavior? Combined, these Impact metrics do indeed move Customer Lifetime Value in their own way, but each can be looked at and utilized differently depending on the strengths and weaknesses in your customer relationships.
We will go into each Activation, Engagement, and Retention below (and save loyalty Cost for another day), but first, it’s critical to understand where many loyalty programs go wrong in calculating and improving these metrics.
First, your program (and measurements therein) are only as good as your data. One of the hallmark challenges with loyalty is a problem we call the Swiss Cheese Effect—when your data is riddled with holes, you can’t tell if you were unsuccessful in activating (or retaining) a customer or if that customer just stopped engaging with loyalty. Having the wrong data can lead to bad (and sometimes expensive) decisions. This is why enrolling customers into the program is so important and why loyalty programs are doomed to failure when the barriers to enrollment are too high for consumers. It’s also why letting digital consumers checkout anonymously on your website is foolish—Doordash, Uber, Amazon, Spotify … none of them allow it.
Second, it’s easy to rapidly drown in this data, even with less than a million consumers and worse with many millions. This means you need to have the right tools in place. Far too often we observe small teams who spent years banging their heads against difficult tools only to revert to using basic (useless) metrics simply because they were unable to easily get more sophisticated answers. As we will discuss in the next installment about Cost, this is foolish—saving a few dollars a month on inferior technology only to give away millions in unnecessary discounts through a loyalty program that’s not working. If you can’t measure if it’s definitely driving an impact, it’s likely not.
And third, the only way to actually change these numbers is to test your way to success. Too often we see brands afraid to do marketing that doesn’t work so they revert back to the tried-and-true “spray-and-pray” email blast. Yes, you got lots of opens but is it driving a change in consumer behavior? Think scientific method, think e-commerce hyper-personalization, think Uber variable pricing—no one gets it right the first time, but the best in the business are not afraid to fail via test-iterate-measure-refine. We encourage our customers at Thanx to “Guess Better” and “Test Faster”—no marketer has all the answers so stop holding yourself to those standards.
Many customers naturally won’t return on their own, which means you end up paying to reacquire them. It can cost anywhere from five to 25 times more to acquire a customer than to retain one you already have according to the Harvard Business Review. One excellent way to track activation is understanding your conversion to second or third purchase. What percentage of customers convert at 7, 14, 30, 90 days? This is a compound metric, how good is your product, your service, your follow-up marketing, etc.? It’s not just about loyalty. Thanx data shows customers who get to a 3rd purchase are 10x more likely to make a subsequent purchase.
And for those customers who do reach three purchases within a predetermined amount of time, their impact can be measured in terms of continued engagement. One way to increase the impact of these super-engaged customers is through challenges. Offering an on-brand perk for achieving elevated spend or visit thresholds is how many sophisticated brands have gamified their loyalty experience. Chipotle’s launch of “Extras,” personalized challenges for customers to earn extra points and achievement badges, helped the brand surpass $2 billion in digital sales in 2021.
Focusing on impact can also aid in customer retention. Loyalty programs can prevent existing customers from churning by increasing the impact of their program among these segments of at-risk customers. Tracking how many known customers return month over month exposes opportunities for marketers to re-engage with potentially lapsed customers. Brands can analyze the optimum time to message these customers if the impact of the program is tracked across different stages of the customer journey. And the results can be significant. Improving customer retention rates by just 5 percent can increase profits by 25 to 95 percent, according to a Bain & Company study.
Impact: Iteration and Measurement
If you want to change a metric, you need a strategy. Thanx data shows that personalized marketing is 6X more effective than generic communications at driving revenue. Sophisticated loyalty platforms can A/B/C/D multivariate test and even add a control group to definitively measure revenue impact, not just opens and clicks. For maximum effect, create multiple touch points with a range of incentives, including non-discount rewards to avoid discount-seekers and brand erosion. There are lots of ways to personalize your loyalty outreach. A few variables to test (and remember, no one has the answers so test, test, test):
- Channel (email, SMS, push notification, digital ad)
- Subject lines
- Message and creative
- Customer segment or spending behavior that qualifies or disqualifies customers from a message.
There are infinite, but some examples:
- Customers who have never ordered for the dinner daypart
- Customers who order 1x a week
- Customers who spend more than $100 per month
Finally, how do you know if what you’re doing is working? Steal a page from the world’s best tech companies and look at cohorts. What is your 60-day third purchase conversion today (e.g. for the group of people who made their first purchase 60-90 days ago) and how does it compare to the cohort from the same time last year? This is how you think about same-store sales; why not use the same logic for loyalty metrics?
Impact is far more than “do my loyalty customers spend more than my non-loyalty customers.” If you have strong Capture Rates (Reach) and a manageable Effective Discount Rate (Cost), then improvements in Impact will always translate to the bottom line.
Learn more about why Reach, Impact, and Cost are critical metrics for your loyalty program during our webinar with QSR, “How to measure the health and effectiveness of your loyalty program” on Thursday, March 30, 2023 at 2 pm ET.
Zach Goldstein is the CEO and founder of Thanx. Founded in 2011, Thanx is a guest engagement and retention platform helping restaurants and retailers become more digitally agile to maximize customer lifetime value. Prior to earning his MBA from Stanford, Goldstein honed his experience in the customer loyalty space at Bain & Company, helping companies perfect their retention and reward strategies as early as 2005.