Here’s how to work out if your current rewards scheme is cost-effective

A rewards scheme is essential for any business in order to maintain a strong relationship with its customer base. Building that solid customer base is only half of the battle in generating a high customer life value (CLV). The other half is maintaining it on a longer-term basis, maximising revenue, and ultimately ensuring the health of your respective bottom line.

Forbes recently heralded loyalty programmes as the ‘new pillar for next-gen customer engagement’, with companies embracing a digital transformation sooner than anticipated following lockdown. It is likely that the average loyalty agency

will be looking forward to a highly profitable half-decade or so, with the loyalty management market set to grow from $8.6 billion to $18.2 billion in that time.

But is there a danger that you may not be able to profit, or even break even from your own loyalty offers? What does a cost-benefit analysis of your scheme actually reveal?

Measure and then optimise

There are many metrics that you can use in order to gauge whether or not your loyalty programme is worth sticking with or needs improvement. The first of these is the enrolment rate. As the first step, it’s a simple stage of the process, but your figures in this area demonstrate how successful the marketing campaign around the loyalty programme has been at the very least.

Following on from this, it’s important to consider the engagement rate – how many of those enrolled have actually gone beyond that stage to truly engage with your loyalty programme? The active engagement rate is measured by taking the number of customers who engaged and dividing it by the total number of customers.

Up and running? What’s next?

Once the rewards programme is fully established, consider the repeat purchase rate (RPR) – are customers coming back for more, or stopping at just the one purchase? Above all – is the loyalty programme actually serving its purpose?  You can measure the RPR by taking the figure for repeat customers, dividing it by the total customers, and multiplying that number by 100. 20% to 40% is generally considered a positive range.

You might also want to keep an eye on other metrics that contribute to the overall customer lifetime value. For instance, check out the percentage of sales from repeat customers, or the organic return rates for members. You may even find ways of intertwining this with bringing in new customers via a recommendation scheme.

Then we have the redemption rate (RR), which shows the amount of clients that have redeemed their benefits through use of loyalty points or any other free offering scheme. This is calculated by taking the figure for customers who redeemed rewards and dividing it by the customers that earned rewards. Again, 20% or above is a solid target to aim for.

Knowing the specific metrics of a loyalty campaign goes some of the way toward improvement. The ultimate goal should be optimisation, which in essence can only be done with the benefit of these metrics. The most important thing to remember regarding your campaigns is that measurement and optimisation are both ongoing processes rather than one-and-done procedures.