In business, whenever you decide to launch a strategy or experiment with something, you have to measure its success – or lack thereof. Was this experiment good or bad for your business?
Whether you’ve decided to hire a media buyer, use new automation software, launch a rewards program, use inventory-management software, or something else entirely, measuring its success is imperative to your success.
Measuring the success of your loyalty program is no different. However, with loyalty programs, before measuring success, you should consider best practices and tips and avoid common mistakes.
A loyalty program where customers don’t understand your points system is doomed to fail. Why? Because customers don’t see any value in it.
So how do you measure loyalty program success? How do you set your goals? What can you measure and achieve? Keep reading to answer all these questions and ensure a successful loyalty program for your e-commerce business.
Understanding customer behavior
To create customer loyalty, you first need to understand customer behavior. What do customers do when they see your product?
More importantly: Are customers searching for your product or something similar to it? Or are they entirely oblivious to your brand and what you have to offer?
Understanding how customers think and react forms the basis of attracting those customers and establishing long-term loyalty with them.
The global online retail segment is a fast-growing and highly competitive one.
Insider Intelligence forecasts that US retail e-commerce sales will rise by 16.1% to $1.06 trillion in 2022. Globally, the research firm expects e-commerce sales to hit the $5-trillion mark in 2022 and rise to $6 trillion by 2024.
In terms of “fastest-growing” categories, Insider Intelligence expects apparel to be the leading segment in terms of growth followed closely by books, music, and video and computer and consumer electronics.
This means that as more competitors emerge, businesses need to find ways to stand out to their customers and build retention to see ensure a sustainable business.
The global loyalty management market is expected to grow to $18.2 billion by 2026 from $8.6 billion in 2021, registering a compound annual growth rate (CAGR) of 16.3% between 2021 and 2026, reports MarketsandMarkets.
“Major growth drivers for the market include increasing adoption of omnichannel and multi-channel programs, technological advancements, and a growing need for competitive differentiation.”MarketsandMarkets
Why loyalty is important
If you’re just getting started launching your online store, then you’ll need to acquire customers and then retain them.
But if you’ve had your store for some time, or if you’re looking to create a unique omnichannel experience, then customer retention should be your top priority.
- You are 60% to 70% more likely to sell a product or service to an existing customer than to a new one. New customers are only 5% to 20% likely to buy a product from you. (Forbes citing Marketing Metrics)
- Increasing your customer retention rate by 5% can increase your revenues by 25% and up to 95%. (HBR via Bain & Company)
- 70% of customers who like your loyalty program are “more likely” to recommend you to others. (Bond)
- Successful loyalty programs can increase revenue “from customers who redeem points” by 15% to 25% a year. This usually occurs via an increase in the frequency of purchases, average basket size, or both. (McKinsey)
- Nearly two-thirds of established loyalty programs “fail to deliver value.” (McKinsey)
- Offering a points-plus-cash option can increase point redemption by 20% to 25%. (McKinsey)
Further reading: Return on Experience: What You Need to Know About It
Customer loyalty program mistakes to avoid
Before you learn how to measure the success of your loyalty program, you first need to ensure you avoid common customer loyalty program mistakes that can hurt your business more than any metric you have.
Let’s look at these common mistakes in brief:
1. No clear points system
We’ve hit on this at the start of this post. Customer loyalty programs are usually built on a points system. Customers make purchases and accumulate points.
However, a mistake many businesses make is not being clear on the value of a point and how much each point – or number of points – is worth.
One of the world’s best loyalty programs is Ulta’s Ultamate. Ulta gives customers in its basic tier 1 point for each $1 spent. So if a customer spends $50, they get 50 points; if they spend $100, they get 100 points and so on. Clear right?
Now imagine another business with a program where spending $50 can mean earning 10 points or 100 points. The customer can never figure out the value of the points they earn.
Can you expect many purchases from this customer? Nope!
2. Buy. Buy. Buy
Most loyalty programs are built on getting customers to buy products to earn points. Period.
But customers today aren’t merely interested in accumulating points and hoping for the best. They’re looking for more personalized experiences, better value, and accordingly better rewards.
Take Ulta and Sephora, two of the world’s best beauty loyalty programs, both have a birthday month where customers can earn double points and get a free gift.
With personalized rewards, you can be sure customers can stick around longer than they would without those benefits and rewards.
3. You have a loyalty program?!
Customers will often want to explore your rewards program a few times before they decide how good – or bad – it is. But the before they get there, do your customers even know you have rewards program?
You’ll be surprised by the number of brands who don’t inform customers about their rewards program. Like it’s some military secret!
If you want to engage customers, they should know you have a loyalty program, how it works, and what’s in it for them.
The best way to do that is to create a loyalty program explanatory page.
“Loyalty programs are an often overlooked area for performance improvement that can help offset the ongoing willingness among consumers to try new brands and retailers.”(McKinsey)
How to measure loyalty program success
Now that you’re familiar with customer behavior, what loyalty is, and the do’s and don’ts of rewards programs, let’s see how you can measure your loyalty program’s success.
There are a few success metrics you need to be aware of.
If you’re launching a specific campaign, such as a Black Friday campaign or Christmas campaign, you will need to note this in your measurements and compare similar periods to each other.
For example, you may choose to compare your Christmas sales to your Black Friday sales to see which fared better. However, comparing and measuring your loyalty program success during June 2022 compared to May through July 2021, would be unfair.
Similarly, you may choose to compare the first three month of 2022 to the same period in 2021 or 2020. But you’ll have to note that the first three months of 2020 were the start of the pandemic.
Let’s look at the top customer loyalty program success metrics you should be measuring:
- New customer sign-ups
While rewards programs should be part of your customer retention strategies, they do help entice customers and increase your customer acquisition rate.
Accordingly, you should measure your enrollment rate or review the number of new customers who signed up for your rewards program within a given period.
Further reading: 8 Secrets that Make the Starbucks Loyalty Program So Popular
- Customer retention rate (CRR)
Your customer retention rate (CRR) is the most important measurement among your loyalty program success metrics.
CRR indicates how many customers have repeatedly purchased from your online store in a specific time frame. This could be a week, month, year, quarter, or year.
To measure the customer return rate, you’ll need to subtract the number of customers you have at the end of a certain period (let’s say a month) by the number of customers acquired throughout that period. Then you should divide the results by the number of customers at the beginning of that period or month.
- Redemption Rate (RR)
The redemption rate measures how many points were redeemed during a period of time. It shows if customers are engaging with your program or if they are merely accumulating points. (which isn’t a good thing!)
To calculate your redemption rate, you’ll need to the number of points redeemed by the total number of points issued within a period of time.
If you’ve issued 1 million points in a month and customers redeemed 500,000 points then:
RR = 500,000 / 1,000,000 = 0.5 x 100 = 50%
However, it’s worth noting that the average redemption rate stands at around 13% to 15%. So if your RR is below 20%, you’re still good. If it’s below 10%, then you may want to see why customers aren’t redeeming points.
Is it too hard to earn points? Do customers need a ton of points to earn a small reward? Consider these points and make improvements to your loyalty program.
- Repeat purchase rate (RPR)
Another important loyalty program success metric is the repeat purchase rate (RPR). Rewards and engagement programs are designs to increase loyalty.
Accordingly, a spike in your RPR indicates that your loyalty program is performing well. Your RPR focuses on the average number of customers who make repeat purchases within a set time frame.
To calculate your repeat purchase rate, you’ll need to divide the number of customers who purchased from your store within a period (month/quarter/year) by the total number of customers within that same period (month/quarter/year).
So if we’re calculating the RR for Q1 2022, and you had 800 customers who made repeat purchases and a total of 5,000 customers by the end of the quarter, your RR equation would look like this:
800 / 5000 = 0.16 x 100 = 16%
It’s worth noting that while the repurchase rate is a loyalty success metric, it’s not a metric that grows fast. It takes time to see a rise. A good repurchase rate usually stands between 20% and 40%.
- Loyal customer rate (LCR)
A loyal customer, by definition, is someone who makes regular and ‘repeat’ purchases from your store. Specifically more than four purchases within a single year.
Unlike the repeat purchase rate which doesn’t focus on the exact number of purchases, the loyal customer rate (LCR) focuses on customers who make four or more purchases within a year.
To calculate your LCR, you’ll need to divide the number of customers who make four or more purchases from your store within a year by the total number of unique (or new) customers within that same year.
- Participation rate (PR)
Your participation rate indicates how many of your new customers are engaging with your program. Are new customers active and excited? Or are they bored and not engaging with your program?
Not only does the participation rate help you measure your loyalty program’s success but also indicates how easy it is for new customers to hop on board and start using your program.
Further reading: These 17 Industries Get the Best Results with Loyalty Programs
To calculate your participation rate, you’ll need to divide the number of members in your program by your total number of customers.
- Active engagement rate
The active engagement rate indicates the average number of customers who have not only signed up to your rewards program but who are actively engaging with it by taking actions to earn points and spend them.
These people can be adding information, doing social shares for points, making purchases, referring others, among other actions.
To calculate your active engagement rate, you’ll need to divide the number of engaged customers by your total number of customers.
If you find this metric to be low, then you need to find ways to improve your loyalty program. This can mean adding new actions or activities to help customers engage or revamping the value of points earned per purchase.
You may even consider doing double-point days to see if they’ll pump engagement or not.
Ignoring your active engagement rate can have serious implications on your loyalty program success and overall effectiveness.
3 more indicators of loyalty program success
In addition to the above metrics that help you measure loyalty program success, there are two more elements or factors that you need to be aware of.
- Customer feedback
- Average spend per customer
- Referral rate
Let’s look at each one in brief.
- Customer feedback
While this is not a metric, getting reviews for your rewards program shows you how customers feel about it. And whether or not they’re enjoying and using it.
Getting customer feedback serves you in two ways:
- It tells you how customers feel about your brand and rewards program.
- It allows customers to tell you how you can improve your program and your service.
- Average spend per customer
An increase in customer loyalty should translate to more purchases. An increase in the average spend per customer is an indicator that you have a successful rewards program.
If customers are making bigger purchases, or increasing their average order value, it means your rewards program is working and enticing them to buy more from you.
- Referral rate
A good rewards program is often associated with referral marketing, specifically a referral program. Accordingly, measuring your referral rate indicates how much customers trust your brand and care to invite friends, family, and colleagues to get the most of it too.
Generally, there are many benefits to referral programs. Chief among those is that they are cheap and having a referral marketing program means you can grow your customer base and reward customers for actions other than purchases. It’s a win-win for you and your customers.
To calculate your referral rate, you’ll need to divide the number of referred purchases (those purchases coming through referrals) by the total number of purchases.
In today’s fast-paced digital world, with more brands going online – and many even starting online before they consider a brick-and-mortar option – competition is becoming more intense.
To stand out, you need to build a relationship with customers. If you’re a brand that’s just creating ads with the hope that customers will make a purchase once they land in your store, then you are probably losing more money than you are making.
As you have seen, research shows that you can grow your sales and revenue significantly through repeat customers. Those customers who are now familiar with you and your brand, who keep coming back.
However, without a loyalty and rewards program, you risk losing those customers to the nearest competition who may offer a price cut or a better experience. So why give customers a chance to leave when you can give them a chance to stay?
That’s where creating a loyalty program comes in. The next step is to measure its effectiveness and success.
Use your rewards program to create unique experiences for customers and in return, they’ll reward you with loyalty, additional purchases, engagement, and feedback.
Want to explore how a loyalty program works and check these stats in real-time? Book a demo with Gameball and our team will set you up with a rewards program that suits your needs and customers.