Is Your Loyalty Program Costing You?

By analyzing the right metrics, loyalty programs can be highly profitable.

April 07, 2022

Woman uses Loyalty Program App

ALEXANDRIA, Va.—Loyalty programs are used by retailers to do that just that—gain customer loyalty, but while increased sales from these programs may seem to cover the cost of offerings (such as a free coffee or pastry), how can you be sure your loyalty is not diminishing your bottom line? Harvard Business Review conducted a study analyzing 15 months of transactions from a major Asian retailer that launched a new, paid loyalty program and found three key takeaways for loyalty programs.

Look at spending trends on an individual level. On average, customers spent more than twice as much per month after subscribing to the Asian retailer’s loyalty program, but not every customer did this. Some increased revenue for the retailer, and some did not.

It’s important to look closely at the program data to find out which customers are most likely to increase their spending the most after joining a loyalty program. How can a retailer do this? HBR says that they must go beyond average results to track and analyze changes in purchasing patterns on an individual level, so set up concrete methods to analyze the data of the program, preferably before the program is launched.

Measure what drives profit changes. Retailers should find out what customer behaviors are driving shifts in overall profits. In its study, HBR found that after customers subscribed to the loyalty program, 75% of the revenue increase came from new products that customers had not previously purchased, which showed that one part of the successful program was that it encouraged customers to try new things.

However, while the total number of purchases increased after the loyalty program launched, the average basket size decreased, and HBR attributed this to a free shipping attribute of the program, disincentivizing customers to loop their purchases into one order. Over time, this retailer could have substantial cost implications because of shipping costs, meaning that if loyalty members incur greater costs, higher revenue may not translate to higher profits.

Analyze all costs associated with the program. It’s important to look at not only revenue changes but also the various costs associated with a loyalty program, including both the cost of additional goods sold and the cost of any benefits included in the program.

In HBR’s study, 14% of the members contributed the highest profits despite incurring high costs for the retailer, 46% generated a sizable increase in profit without as much cost, and the remaining 40% generated minimal profits and incurred substantial costs.

NACS Magazine dove into loyalty programs and how they can provide convenience retailers with critical consumer insights and a competitive edge.