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.

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