ROI on a loyalty program: Is it a big mistake to try and justify?

10th August 2017
ROI On A Loyalty Program: Is It A Big Mistake To Try And Justify?

The biggest mistake that CEO's and CFO's make when asking marketing teams to justify investing in marketing strategies is to get them to provide the executive team with a Return On Investment (ROI) calculation. But is ROI a good measure for making the decision to implement a Rewards and Loyalty Program?

Should you be focusing on proving ROI with rewards and loyalty programs?Should you be focusing on proving ROI with rewards and loyalty programs?

'Of course it is is usually the response from the CFO of the company, because he/she erroneously believes that implementing a Rewards Program is a CAPITAL outlay, and any ongoing costs should be budgeted for separately as these are regarded as Additional Expenses implemented to drive incremental revenue. How wrong can they be?

Very wrong. In fact, trying to justify an investment in a marketing strategy is one of THE biggest mistakes one can make. I made such a big mistake once when I presented a Rewards Program proposal to a prospective client. One of the requirements was to present ROI and to ensure that I included ALL of the costs. Now the costs can initially amount to quite a high number, and these include:

  • License Fees
  • Set Up Fees
  • Card Production
  • POS Marketing Material
  • Training
  • New Equipment or Integration into Existing POS Systems

And the biggest cost of all? The 5% or 10% 'discount' to the customer. 'How can we afford that?' they asked. The biggest disadvantage I had was that I didn't have access to the company's management accounts – they would not advise me of:

  1. Their advertising and marketing budget
  2. How much was allocated to direct marketing (if any)
  3. What direct response communication they had conducted before
  4. The results of these communications

Even though the ROI was very positive, when I presented all of the above costs to them, my proposal was not considered. (This was 18 months ago, and I am not aware if they have actually implemented a program at all).

Loyalty and rewards programs aren't a new expense, they fit into your existing budget.Loyalty and rewards programs aren't a new expense, they fit into your existing budget.

It's important to stress that this is NOT a new cost – Redirection of Marketing Spend Loyalty and Rewards Programs are a REDIRECTION of Marketing Spend. It is NOT a new expense that needs to be fit into the budget – the budget MUST be massaged and part of the advertising and marketing budget should be channelled into ENGAGING with customers. The real benefit of a well-directed and managed CRM program can be measured by:

  • The increase in frequency of customers
  • The increase in basket size
  • The increase in total spend by each individual customer.

Then as the program becomes more sophisticated, more encouragement can be made to get customers to buy higher margin products, which makes the program more profitable. Of the above "expenses" the single biggest perceived cost is the 5 per cent reward. However, before a gross 5 per cent of total turnover is budgeted for, a realistic forecast has to be made on what proportion of the customer base will take up the offer. Included in this calculation should be the following factors:

  1. What percentage of the customers will realistically take up the rewards program and the offers? (On average, this should amount to between 5% and 25% of the total customer base.)
  2. Of these, between 40% and 60% will be active
  3. Of these active customers, only 50% will redeem their rewards on a regular basis.
Cultivating customer loyalty requires some upfront investments but the outcomes are well worth it.Cultivating customer loyalty requires some upfront investments but the outcomes are well worth it.

Assume the total known client base is 100,000 customers and the average spend per customer is $200 per annum, then annual revenue will be $20 million. If you calculate the maximum variables in the above numbers, about 7,500 customers will redeem their 5 per cent rewards of $75,000. If the average cost of sales of the products sold is 30 per cent, then the cost of the rewards redeemed is only $22,500. This as a function of $200 million! This is ONLY 0.1 per cent of turnover! But look at the positive atmosphere it has created, as well as the incremental revenue it has generated. Once this incremental revenue has been calculated, the ROI will be exponential! I know I won't make this mistake again! Will you?