How Effective Is Your Customer-Loyalty Program?

Last week, FEI marketing whiz Marka told savvy salesperson Zoot about the advantages of a Customer Loyalty Program. This week, Marka shows Zoot how to calculate how effective FEI’s loyalty program is. Remember, fire = print.

Zoot and Marka sat at a table at GrapeLeaf Yogurt. They observed a happy customer at the register, getting a free froyo because he’d punched the tenth box on his rewards card.

“He sure looks happy,” Zoot said.

“True,” Marka agreed. “Obviously, making customers happy is a key goal of any customer-loyalty program. But there are more scientific ways to measure customer happiness and loyalty than just smiles. Here are a some common metrics we might want to employ to measure whether FEI’s loyalty program is actually, well, making customers loyal.” [Marka began writing on her napkin.]

• Customer-Retention Rate

“This metric indicates how long customers stay with FEI,” Marka explained. “And it’s an important one. A study by Olympus Consultants has shown that a 5 percent increase in customer retention can lead to a 25-100 percent increase in profit.”

“How do we measure it?” Zoot asked.

“Easy,” Marka said. “Retention Rate = (1 – Attrition rate).”

“That’s it?” Zoot asked.

“Yep,” Marka said. “If our loyalty program is successful, this number should increase over time, as the number of loyalty program members grows.”

“How will we know for sure if customers are staying with FEI because of the program, or something else?” Zoot asked.

“Good question,” Marka replied. “Why don’t we run an A/B test against program members and non-program customers to determine the overall effectiveness of our program?”

“All right, whatcha got next?” Zoot inquired.

[Marka scribbled more on her napkin.]

• Negative Churn

“Churn is the rate at which customers leave our company,” Marka continued. “Negative churn is a measurement of customers who do the opposite—upgrade, purchase additional services, or buy more of what they’re already buying. Calculating negative churn among customers in our loyalty program can give us a good idea of how well the program is working. And it’s an easy calculation to make.” [Back to the napkin she went.]