Harvard Business Review has published a thoughtful article entitled, “Your Loyalty Program Might Be Losing You Money,” (by Raghuram Iyengar, Young-Hoon Park, Qi Yu) in which they discuss the different types of analysis you should be doing on your loyalty program to ensure it is as profitable as you think it is.
The authors point out that many loyalty programs look successful because people who tend to buy a lot from a company are also the ones who are most likely to join the loyalty program. To measure success, they suggest you need to look at how individuals and segments behave with and without the loyalty program in place: do the people who were your customers before you launched your loyalty program spend more after the program launched?
With that said, the authors make several recommendations:
- Go beyond averages and analyze trends on an individual level.
- Don’t just look at the changes in profit — also consider the measures that drive those changes.
- Factor in the costs of the program itself.
My two comments on this article are:
- It’s tricky to do the type of analysis the authors suggest unless you already have a loyalty program in place since this is usually the tool that facilitates the collecting of customer spending data. It is hard to know how much consumers are spending unless they “swipe” every time they make a purchase.
- Many loyalty programs exist not only to increase the purchase frequency or check size, but also to extend the lifetime of the relationship with the consumer. This is difficult to measure through the analysis recommended by the authors, but are very important, given that so many loyalty programs are nowadays in it for the “long game.”