Last week I started a new series on measuring loyalty program performance and ROI. I discussed the proper metrics and related measurement issues if the program’s primary goal is to growth your business. Today I would like to take a look at goal #2 (to reward the best customers) and goal #3 (to catch up to competition).
When Your Loyalty Program Aims to Reward Your Best Customers (Goal #2)
Although rewarding your best customers seems intuitive, it is not without controversies. On one hand, your top customers spend the most at your business and may be the most responsive towards your marketing messages. On the other hand, these customers may already be heavy product category users with limited growth potential. They may also have higher expectations and are harder to please. So rewarding the best customers as the primary loyalty program goal will make sense for some businesses and will not for some others.
I’ll assume that you have done your work and have decided that you indeed want to build a loyalty program to show appreciation to your top customers. How do you gauge success in reaching this goal? I believe four measurable success metrics suitable for this purpose are:
- Retention rate, for use it or lose it type of business;
- Purchase loyalty level, for always a share type of business;
- Habit level, for frequently purchased product categories; and
- Positive word-of-mouth volume among social media fans.
Retention Rate or Purchase Loyalty as Success Metric
Depending on your industry, customer loyalty may be manifested very differently. We can think of it in two broad categories. In the first category, customers can always buy simultaneously from multiple businesses, and buying from one business most likely does not preclude purchases from another business. Businesses that fall into this always-a-share category include grocery stores, airlines, and restaurants. For these businesses, share-of-wallet is typically a good indicator of purchase loyalty. In the second category, consumers typically use only one provider. If they leave, they will take all of their business away to switch to a different business. Examples of businesses in this all-or-none category are wireless service providers, insurance companies, and TV and Internet providers. For them, retention rate and customer lifetime duration would be better proxies of purchase loyalty.
Retention rate is the percentage of customers who stay with your business over a given time period. For example, if you start the year with 1 million customers, and 700,000 of them are still here at the end of the year, you have an annual retention rate of 700,000/1 million = 70%. Customer retention rate is typically measured for the entire customer base. But in this situation, we are trying to gauge whether best customers are feeling appreciated and rewarded. So the retention rate should be calculated based on the top customers that you are trying to target with the program. A successful program at rewarding top customers should result in an increase in retention among these customers. Because of increased retention, your average customer lifetime among top customers should also be longer.
Share of Wallet and an Alternative
The share-of-wallet measure for always-a-share businesses is based on how much consumers buy from you vs. how much total consumers spend in that product category. So if a consumer spends $600 a month on groceries and $150 of that is spent in your grocery store, the share-of-wallet for this customer is 25%. In the current context, you will be gauging the share of wallet for your top customers and see if there is an increasing trend as a result of program participation.
Since your top customers already spend a lot with your business, it is easy to believe that your share-of-wallet is naturally very high among these customers. While this certainly can be true for some customers, it may not always be the case. Someone flying a lot on one airline may simply be super-travelers who fly a lot for business. It is important to calculate accurate share-of-wallet instead of using spending as a proxy. The challenge of course is that this requires information on how much consumers are spending elsewhere, which you usually don’t have access to. Two things you can do to get the necessary information. One is to purchase third-party panel data to get competitive spending information. The other alternative is to survey your customers to get an idea of their typical category spending (e.g., how frequently they fly, or how much they spend on grocery bills every month).
When neither one of these options is feasible, an alternative (although less perfect) measure of purchase loyalty is through modeling the relationship between interpurchase time and spending in a transaction. Take grocery shopping for an example, if a consumer typically shops at your store once a week and spends $250. This time the consumer hasn’t shopped at your store for 10 days. You would expect the consumer to buy more because there is likely more to replenish at home. But if the consumer comes in after a longer period of time and does not spend more, the consumer may be getting replenishments from other stores, which means lower share-of-wallet for you. You can find an application of this approach in one of my papers. This measure can have inaccuracies. For example, in the case above, the consumer may simply be out of town for three days, which explains why the consumer waited 10 days before making the next purchase rather than buying once a week. But such special cases tend to smooth out over time if you have a long enough period of purchase data. The other thing to keep in mind is that this method tends to work better for things consumed at a more or less constant rate. So waiting 10 days would typically mean more needing to be purchased.
Habit Level
I wrote previously about turning attitudinal loyal customers into habitual customers. If your program targets the best customers, making their purchases more habitual and routine can also be an indicator of success, especially if your program is based more on economic rewards and has minimal soft components such as social benefits, status, etc. Whether this is a suitable metric for you depends on the nature of your business and your program. For example, some purchase types are driven more by need rather than habit (e.g., home repair service), or the purchases may not happen often enough to foster habit development (e.g., car purchase).
To see whether your program successfully fosters purchase habit among your top customers, you will need to calculate a habit score for each of these customers. You can read more about how to measure habit in a previous post. Once you have the scores, you can either observe its evolution over time or compare with non-program members or a combination of both.
Positive Word-of-Mouth Volume
Another metric to gauge whether your program is making top customers really happy is to measure positive word-of-mouth from these customers. The assumption is that customers who are loyal to you and appreciate what you do for them will want to talk about you with others. Although this motivation to share good news may not be nearly as strong as the impulse to share bad news, on the whole, you should see an increase in positive word-of-mouth over time due to your program.
How do you measure that? If you have a referral program, metrics from the program among your best customers could be used. In addition, positive buzz and engagement from your fans in social media would be another telltale sign. Since your social media followers are more likely to be customers who do a lot of business with you, making your top customers happy through the loyalty program should translate into increased likes, positive mentions and comments, more retweeting of your messages, etc. These metrics are not very suitable for member- vs. non-member comparisons, as the not-so-interested non-members may not even follow you on social media, much less talking about you. So you are most likely to engage in some trend analyses with these metrics. In that case, it is important to control for simultaneous development and changes in your social media strategy to make sure that increasing positive word-of-mouth is not simply the result of a more effective social media strategy. This is an issue I explained in the first part of this series. So I won’t repeat it here.
When Your Goal is to be On Par with Competition (Goal #3)
Another possible goal for your loyalty program is to catch up with competition if a lot of your competitors have installed a loyalty program and are putting pressure on your business. The proper metrics for this goal overlap with those for Goal #2 above. Specifically, retention rate and purchase loyalty as indicated by share-of-wallet or purchase timing-quantity relationship discussed earlier are also suitable here. However, in applying those metrics, it is important to remember two differences. First, as this goal is no longer targeted at top customers, these metrics should be calculated based on your broad customer base instead of only top customers. Second, since you are trying to prevent loss of customers or their spending through your program, you may not necessarily see a strong increase in these metrics. Instead, maintaining the numbers may already be an indicator of success. But if you had already experienced heavy loss of customers because of competitors’ loyalty programs, a successful program from you should revert those downward changes to create an uptrend at least at the beginning of the program and then may taper off to a flat line afterwards.
This concludes the second part of this series. Next week, I will discuss loyalty program performance or ROI measurement when new customer acquisition or improved customer insight are main program goals. I hope you find the information helpful in assessing your own program performance. If you do like what you see here, I would appreciate your sharing the post through your social media channels. You can do so easily by clicking the corresponding social media buttons below. See you next week!