How to calculate ROI for loyalty programme

Spread the love

         By Naftal Nyabuto

Every time I go meet business executives as I pitch a loyalty program , the question that keeps popping up is, how do I get my ROI from this program?That question always takes me back as I expect  a business to connect the critical measurement aspects.That aside, let me explain why Mzawadi loyalty is exclusive for those who want to implement a blue ocean strategy. Loyalty has moved from transactional and  point based system to creation of experiential rewards .A business now needs to develop reward system that takes care of both the  emotional and material needs of the customer both on or off premise.Therefore, calculation of ROI should take care of  every aspect of the client journey right from acquisition , purchase, after sale, day to day lifestyle to alignment with customer experience .

When considering adding a customer loyalty program you first need to ask how you’ll measure its impact. To help you understand more about the methods of measuring customer loyalty ROI, let me summarize what you should be looking for;

  1. Cost of implementing and Rewards

There are four main costs associated with creating a loyalty program: software, design, marketing, and rewards.

Software is used to create and manage your loyalty program and can be designed in-house or purchased through subscription from various providers. These tend to range in price depending on complexity and support

Design costs entail the R&D to create the style and branding of your loyalty program. This is done to ensure that the look and functionality of your program appeals to the type of customers you’re looking to attract.

Marketing /on-boarding your loyalty program correctly is essential. A loyalty program is a long term strategy so you should mention it in all major communication. There is little financial cost here; just a change in business process. and finally .

Rewards. The cost of these will vary and are set-up by businesses on an individual basis. They can be anything from discounts on future purchases, to small or major prizes. This important part of loyalty needs to be designed based on the company’s margins or profits .Depending on the nature of clients your organization is serving, ensure that you don’t under-reward because it maybe perceived as a mockery and may cause backlash or you don’t over reward and end-up increasing the cost of loyalty.

2.Retention rate: Your company needs to have data that shows the percentage of clients churning out over the years visa viz those that stay .Retention rate is calculated from the number of customers that exist over a period and the clients who have defected or churned over the same period. An increase in retention rate has a direct effect on both client acquisition cost and revenue generated .

3.Customer lifetime value (LTV) is a measurement of how much you will earn from an average customer over their lifetime using your product. This you can calculate by looking at the average time a customer is buying your product or using your service (lifetime)  multiply with the average amount they spend per month or year and percentage gross margin per client. This will you a clue as to what each client is worthy over a period of time. This calculation helps determine ROI of your loyalty program because loyalty programs like Mzawadi are meant to increase the value of the client over a time. For example if client life increases from 2 years to three years courtesy of loyalty program, how will that translate to the bottom-line .For example, I take a policy of an insurance  24 months, I pay a monthly premium of Ksh 5,000 and gross margin of  40% ( accounts for revenue earned or profit  after cost of goods sold) .Then CLV will be (24*5000)*40%

Let’s assume:

  • 24 month average lifetime*
  • Average monthly plan of $50/month
  • Gross margin of 60% (to account for only the revenue earned after cost of goods sold)

4.Client churn: This is related to CLV but its direct calculation of the number of clients that are churning out of your subscription or stopped using your services and what direct revenue loss or impact that translates to. For example if you have 10000 clients in your bank, 200 clients have churned out, and each of those clients had a direct profit generated of ksh 1000, then the company has lost 200,000 worthy of profits . Therefore targeting to reduce this churn through loyalty programme should be the target. You can therefore calculate your ROI  based on the % reduction of client churn every year.

 Learning to calculate the return on investment (ROI) of your rewards structure is the best place to start. This means figuring out if the revenue (return) you make from acquiring new customers with rewards is enough to justify the cost (investment) of the incentives you offer.

Mzawadi advises your business to take time to measure your customer’s desires against your company’s financial situation so you aren’t forced to pull the plug on incentives down the road.

Calculation of  ROI for your business might also require you to go an extra mile to calculate the internal rate of investment and payback time .If such complex calculations are expected, then the business will just need  to look at such factors as risk, Net Present Value (NPV) , inflation and net discount rate.

Whichever method you may want to follow, Mzawadi loyalty will help you calculate and track your investment in loyalty to ensure that you achieve your returns within a shorter time .

Join the Conversation

Will not be published.