March 05, 2023

Loyalty Program Expectations

There is a reason so many retail brands tie loyalty programs to credit programs. The goal isn't necessarily to increase customer spend - the goal is to increase the amount of interest charged to a customer.

In my work, it is generally true (your mileage will vary) that loyalty programs increase customer spend by around 10%, plus/minus.

For a loyalty program to work, you need high value customers. Pretend you have a typical e-commerce customer with a 30% chance of buying again, purchasing 1.6 times at $100 each if the customer repurchases.

  • Normal Conditions = 0.30 * 1.6 * 100 = $48.00 of expected spend next year.
  • Loyalty Program = 10% Bump = $48.00 * 0.10 = $4.80.

It doesn't take a rocket scientist to notice that increasing spend by $4.80 a year per customer in a loyalty program won't do anything, after you subtract all normal business expenses and then subtract marketing expenses associated with a loyalty program.

Take a customer with a 70% annual rebuy rate, 5 purchases per year at $100.
  • Normal Conditions = 0.70 * 5.00 * 100 = $350.00 of expected spend next year.
  • Loyalty Program = 10% Bump = $350.00 * 0.10 = $35.00.

You can make an argument that $35.00 is a credible amount of increased spend, so yeah, have at it, create a loyalty program for this customer.

The problem, of course, is that you don't have many of these customers.

On average, a customer needs to achieve a fifth purchase before the customer has a 60% or better chance of repurchasing next year. Once a customer has a 60% chance of buying next year, the customer generates sufficient net sales to make loyalty programs both noticeable and meaningful (see my first example above for a situation that is not noticeable and is not meaningful).

Here's an exercise you can perform with your own data.  Segment all twelve-month buyers by number of life-to-date purchases as of one year ago today. Select all customers with 5+ life-to-date purchases from that audience. Then calculate total spend in the next year from that audience. Finally, multiply that number by 10%. That's the expected amount of sales increase a credible loyalty program "might" deliver. Again, your mileage will vary.

For a typical e-commerce business, the audience of 0-12 Month 5x+ buyers generated maybe 20% of annual sales, plus/minus. Multiply that amount by 10% and it means a credible loyalty program "could" add 2% to annual net sales levels.

This is why large retail brands tie loyalty to credit ... it allows them to make profit off of the interest.

This is why I advocate for e-commerce brands to simply go find another new customer ... the math works out so much better over time.

No comments:

Post a Comment

Note: Only a member of this blog may post a comment.

Apparel (Not All of It) is Dying

Many of my clients sell apparel ... often Women's Apparel. And many of you are telling me that Apparel is dying. Some of you don't s...