5 March 2025
Lance Walker, Former CEO of Loyalty NZ
If there is one thing I got asked (and still get asked) more than anything else in all my time working in loyalty programs it’s: “How do I know my loyalty program is working”. If I had a dollar for every time I had been asked that!
Of course, it is a very fair and important question… perhaps one of the most important. Some research I have seen suggests that in 2024 the global spend on loyalty programs was set to be over $US 150 billion dollars. Who knows if that number is correct or not… but let’s just agree that whatever the number is, it’s going to be big. Is this investment in loyalty programs returning value or not?
One answer to the question is “it must be, or why would everyone still be doing it!”. There are lots of very smart brands involved in the loyalty game who wouldn’t be committing so much to these programs if they weren’t seeing benefit. And there is some truth to that. The reason that loyalty programs have existed in one form or another for well over 100 years is that the basic motivations behind them are proven. Recognising and rewarding customers and building a trusted relationship with those customers, is what drives loyalty, and loyalty programs facilitate this.
But let’s look at the question a little more deeply…
What does “working” mean?
One of the first things I do when confronted with the question, “Is my loyalty program working” is to respond with my own question: “What do you mean by working?”. In order to judge success, you need to know what success you were shooting for; what were your objectives? If you were aiming for a certain increase in retention or reduction in churn, and you haven’t achieved that, then no, perhaps your loyalty program isn’t working (or at least not working as well as you hoped). If, however, your objective was just generically “retention” then judging success is far more difficult —or will become a subjective rather than objective exercise. As the Cheshire Cat says in Alice in Wonderland “if you don’t know where you’re going, any road will take you there.”
There are lots of reasons why someone sets up a loyalty program. In very broad terms these are sometimes summarised as GET, KEEP and GROW; a desire to “get” more customers, “keep” the ones you’ve got (especially those who are of most value), and “grow” their value to you (usually through higher repeat purchase and order value).
Loyalty programs are also used to build brand and competitive differentiation, to collect data about customers and to build stronger engagement with customers. All are valid objectives. But they can quickly become just a shopping list of generic benefits rather than true SMART objectives by which you can judge whether your loyalty program is working or not.
When designing your program objectives:
- Determine what is most important/beneficial to you (and if you have a list, rank them)
- Be specific: an x% increase in retention is better than just “improve retention”
- Ensure you have the ability to measure the objective you’re setting
- Be realistic: targeting an unrealistic objective will mean your loyalty program can be unfairly judged.
Setting good objectives at the outset of your program planning will make it much easier to answer the “is it working” question in the future.
"There is little value in just looking at a result in isolation. The key question is whether the result is showing an improving or decreasing trend, and whether the result is good or bad compared to a comparison point."
What metrics are most important?
The most important metrics are those which relate to your objectives, as above! But speaking generally, when I am looking to assess the success of a loyalty program there are certain metrics which I always look at and which are broadly applicable to any retailer. Some of these are what I would call “hard” measures (assessed using transactional data) and some are “soft” measures (which typically require some research).
- Churn/Retention Rate: Fundamentally, loyalty programs are about retention. If your loyalty program is not impacting retention then it is an indication that it is not working.
- Repeat Purchase Rate/Purchase frequency: A close ally of the Retention Rate; is the customer returning to purchase from you, and how often are they returning? A customer could technically be “retained” but are they purchasing or not, and how frequently?
- Average Order Value: Is the average order value higher than it was before the loyalty program was in play, or higher than for those who are not part of the program?
- Engagement: This can be a more difficult measure to assess but it is important. A low level of engagement is an indication that your loyalty program is not working. The best engagement metrics consider a number of factors including hard factors like participation and redemption rates, frequency and spend, but also qualitative measures to judge how the program impacts the purchase decision.
- Sentiment: Another hard one to measure, but goes to the emotional and brand engagement side of the equation. How does being part of the loyalty program make the customer feel about the brand? Does it make them feel more positive, satisfied and more likely to recommend? Assessing these factors is likely to require research.
The next trick in analysing whether a program is working or not is to be able to accurately interpret the results; in other words, moving from data to insight. When looking at results data there are three important questions I ask;
- What was the objective?
- What is the trend?
- What is the comparison point?
There is little value in just looking at a result in isolation. The key question is whether the result is showing an improving or decreasing trend, and whether the result is good or bad compared to a comparison point. For me, the most important comparison point is to the time period before the loyalty program was in place, or comparing those who are enrolled in the program versus those who are not.
For example: a retention rate of 80% is meaningless by itself. But it has meaning if:
- Your objective was 50%;
- or if the retention rate over the last 3 months averaged 70%;
- or if the retention rate of those who are not part of the program is only 60%.
Now we have a basis to conclude whether the program is working or not.
Industry benchmarks can also be useful, but need to be treated with caution as each sector has its own unique challenges and characteristics. Just because the industry benchmark is 50% and you are showing 30% does not necessarily tell you whether your program is working or not.
The Nirvana Measure: Return on Investment
Ultimately, the most important measure when it comes to judging if a loyalty program is working or not is Return on Investment (ROI). Is the investment I am making in the program (the cost) more than compensated by the return I am getting (which is usually expressed in terms of increased revenue or profit)? I have seen many different ROI models for loyalty programs. The most common take a pure data driven approach using a combination of the metrics discussed above.
For example, looking at the revenue upswing that comes from things like higher retention + higher average order value + higher frequency + revenue from referrals. In using this kind of model we are looking for the incremental impact. If the standard retention rate (without the program) is 50% but for those on the program is 60% then it is the value of the additional 10% which is the key figure. Models like this can be further enhanced by looking at lifetime value from those customers, not just their value today.
Other models use a mix of research and transactional data. For example, one model I was involved with used research with customers to determine the degree to which the program influenced their purchase decisions. Then we looked at the spend from those who said the program did have an impact and ignored the spend from those who said it had little or no impact. In this model we are attempting to determine whether the incremental revenue from those who are influenced by the program offsets not just the cost of the program, but also those who would have shopped with you anyway.
One of the problems with ROI models however is that they can’t always account for what I call the “non-quantifiable” benefits of loyalty programs. For example, one of the major benefits of a loyalty program is that it allows you to collect and use data about your customers and their behaviours. The use of this data creates both direct and indirect benefits, which are not always associated directly with the program. At the end of the day, all ROI models are based on assumptions and, as long as these are well understood and agreed upon up front, they are the best way to answer the “is it working” question.
One final word… Expectations!
When it comes to answering the “is it working” question, it’s important to remember that a loyalty program is not a panacea or magic wand. Just because you have a loyalty program does not mean that your customers will be loyal. A loyalty program is a tool in your loyalty armoury; a very important tool for sure, but just a tool.
The old saying that a “builder never blames his tools” could also be applied to loyalty programs. I remember a conversation with a client many years ago who was complaining that his loyalty program “wasn’t working” …and he was right. There was no noticeable difference in the loyalty of those who were in the program versus those who weren’t. In fact, overall loyalty was diminishing. But as I had to (politely) remind him, the fact that he had a loyalty program could not in of itself do anything for loyalty given that the overall customer experience and levels of day-to-day customer service was so poor. The loyalty program itself was not the issue.
In summary then, the assessment of whether a loyalty program is working or not must therefore be looked at in the context of:
- The objectives set for the program (make sure they are specific, measurable and realistic)
- The trends over time and comparison points (in particular comparing to the periods before the loyalty program was in place and/or comparing results to those who are not part of the program)
- Both hard and soft metrics
- The total loyalty picture and loyalty strategy within which the loyalty program is operating.
Considering these factors will all help in answering the all important “is it working” question.
About the author
Lance Walker has spent 30 years working in loyalty programs and marketing. He is the former CEO of Loyalty New Zealand, which operated the Fly Buys loyalty program, and has served as Managing Director of two leading direct marketing agencies. Lance also founded and ran a specialist customer relationship marketing consultancy.
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