How to Measure Customer Loyalty
10 Loyalty Program Performance Metrics
Building a loyalty program is a serious investment for any business, and it’s also important that a justifiable return on investment is achieved. How do you arrive at ways to measure customer loyalty? As companies want to know what is working and what is not, the top 10 loyalty program metrics marketers should be monitoring.
Measure Customer Loyalty
- Total Membership
- Customer Lifetime Value
- Net Promoter Score
- Redemption Rate
- Active Engagement Ratio
- Breakage Rate
- Participation Rate
- Retention Rate
- Repeat purchase Rate
- RFM
1. Total Membership
This is easily the most straightforward metric, representing the total number of people who are currently enrolled in your program. For obvious reasons, you’ll want to create a strategy to grow this number year over year.
2. Customer Lifetime Value
First, you need to calculate the customer’s annual value. To determine the customer’s annual value, multiply the customer’s average order by the number of expected transactions per year. The result is then multiplied by the number of years the customer is expected to remain an active consumer.
3. Net Promoter Score
The Net Promoter Score (NPS) is rated on a 10-point scale, with those ranking 6 or below as detractors, 7 to 8 as passives, and 9 to 10 as promoters. Customers are asked a range of questions, but the most typical question focuses on how likely a consumer would recommend products, services, and the company itself to friends. The NPS is attained by subtracting the number of detractors from the number of promoters, dividing the result by the number of customers who have completed the net promoter survey, and multiplying this number by one hundred.
4. Redemption Rate
Redemption is defined as when a customer decides to take advantage of the points they’ve accrued. To arrive at the rate, you tally up all the points redeemed by all members and divide them by the total points that have been awarded. If the redemption is below 20%, that should be seen as a source of concern.
5. Active Engagement Ratio
This figure is established by taking the number of members who are currently actively earning and redeeming points in a loyalty program and dividing it by the program’s total number of members enrolled. Companies can choose to calculate active engagement ratios over various spans, but most reports will feature monthly and yearly figures.
6. Breakage Rate
If you divide the number of unspent points by the total number of points issued, you’ll arrive at a figure for breakage. In many sectors, such as rebate issuing, breakage is seen as a good thing. In the customer loyalty business, however, it isn’t good. The point is to keep the customer actively engaged with the program and, by extension, the brand.
7. Participation Rate
Divide the total number of program members by your overall number of customers, and you’ll come up with your participation rate. Some people are more likely to be more actively engaged in your loyalty programs than others.
8. Retention Rate
The reality is that all programs are going to be hit by some degree of churn. By comparing the number of participants who’ve failed to stay active against the number who are active and then dividing this figure by the previous period’s participation, you can get a sense of your retention rate.
9. Repeat Purchase Rate
You take the number of customers who’ve bought more than once in a period, usually 365 days and divide it by the total number of customers over the same period.
10. RFM
RFM denotes three concepts: recency, frequency, and monetary. These are, respectively, how recently the consumer purchases, how often they purchase, and how much they spend. RFM represents another way to calculate customer value.
Understanding the Metrics of Success
You can improve your loyalty program by understanding and optimizing the metrics of success. Figuring out how to measure customer loyalty is simpler than you might expect. The challenge is in harvesting enough actionable data. With a properly monitored loyalty program in place, however, you can crunch the numbers quickly.
Updated September 8, 2020.
Filed under: Loyalty Marketing