Do Business Well

“Loyalty” is an overused and often loosely defined term. There have been several attempts to introduce a more precise financial definition of loyalty so that its impact on a business can be measured and quantified. In his The Loyalty Effect, Frederick F. Reichheld does a superb job of describing the economics of loyalty by demonstrating the unquestionable financial impact of increased customer retention. Still, many people wonder whether loyalty programs actually work. Futhermore, when success is no longer driven exclusively by ⁽⁽cost of contact,” we must be able to measure our “return on loyalty” related investments in order to determine the sucess of a program.

Netcentives has developed a Return on Loyalty (ROL) model, which measures the effect that a loyalty program has on a number of factors that all contribute to a customer’s long-term value. The Netcentives model looks at increased conversion rates (sales that would not otherwise happen), increased lift (response rates higher than a baseline), impact on price erosion, and frequency of purchases, as well as other factors. Let’s take a closer look at the ROL model.

• Investment. Net present value (NPV) of total loyalty-related investments over the life span of a customer relationship
• Conversion. Incremental purchase activity as a function of increased loyalty
• Transaction. Lift as a function of loyalty program; generally a result of higher-margin product sold as a function of increased loyalty
• Price. Ability to maintain, not erode, price point as a function of increased loyalty
• Frequency. Increased number of purchases as a function of increased loyalty
• Retention. Increased life span of customer as a function of increased loyalty
• Total return. Gross returns on loyalty

To quantify the impact of your loyalty program you need to design a control group that doesn’t receive loyalty rewards and cornpare results for the two different groups. This is a critical step because without a control group, it’s impossible to precisely measure a program’s loyalty-related impact and calculate the return on loyalty.

The Netcentives ROL model demonstrates how an increase in the value of a customer can be a function of programs that are designed specifically to improve loyalty. Netcentives operates “loyalty point networks” such as ClickRewards and AOL Advantage and therefore commonly uses points as the vehicle to drive increased loyalty. The ROL model nevertheless is applicable to any loyalty program regardless of the “currency” or mechanism used to increase customer loyalty.

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