The CFO's Guide to Loyalty

How will a loyalty program impact our revenue and margins in the short term and long term?

In the short term, engaged loyalty members boost revenue through increased purchase frequency, leading to higher average revenue per customer. In the long term, a loyalty program improves customer retention, resulting in sustainable revenue growth and profitability as existing customers become brand advocates and drive referrals.

Early on in the program, brands should focus on incentives to drive customer sign-ups and engagement, which are largely transactional (usually in the form of discounts or free shipping). This can compress margins temporarily, but over time, loyalty programs can shift to reward behaviors with less transactional incentives and more emotional ones (like VIP early access sales or insider community events). 

Like any other line item, loyalty can also impact margins due to deferred revenue and redemption costs. Customers earning points create a liability representing their unredeemed value. This defers recognizing revenue until points are redeemed, affecting margin calculations.

What impact do loyalty & referral programs have on CAC?

A well-implemented loyalty program can positively impact CAC by reducing complete reliance on expensive acquisition channels. While acquiring new customers is a necessary growth tool for businesses, repeat purchases from loyal customers reduce the need to constantly grow through new customer acquisition. Once a loyal customer base is created, customer referrals incentivized by loyalty programs bring a steady stream of new customers without the need for additional spend. 

What effect will a loyalty & referral program have on our CLTV and retention strategy?

Loyalty & referral programs enhance CLTV by fostering repeat purchases and deeper engagement, ultimately increasing the value derived from each customer relationship. 

CLTV is a good KPI to monitor when assessing a program’s success, as it accounts for the costs associated with redemption and the revenue generated by active members throughout their lifetimes. 

What are the key KPIs we should track to measure the effectiveness of the loyalty program? Over what time frame should we expect to see impact to these KPIs?

Generally, you can expect to see significant improvements in performance within 90 days of implementing a loyalty program, and after one year, you’ll have enough data to accurately set benchmarks and estimates for future performance. There are a few main KPIs to monitor:

Participation Rate
The percentage of customers that have redeemed points out of all purchasing customers. Generally, you should aim for 5% within the first year of your program as your benchmark here (but note that it varies by industry and company). 

Redeemed Revenue
Refers to the amount that redeemers spend purchases with a redemption, as well as any subsequent purchases. 

Incremental Revenue
Also known as added revenue, this refers to the amount customers who have redeemed points (redeemers) spend compared to customers who haven’t redeemed loyalty points (non-redeemers). It can be calculated by looking at added revenue per customer or the total average revenue of all customers who have redeemed loyalty points. 

Redeemed Revenue Share
The percentage of redeemed member revenue out of total business revenue. 

Incremental Revenue Share
The percentage of incremental revenue out of total business revenue. 

Average Revenue per Customer
The average revenue generated by redeemers vs. non-redeemers.

Repeat Purchase Rate
The rate at which redeeming customers vs. non-redeeming customers made more than one purchase within a defined date range. 

Average Order Values (AOV)
Compare the average order size of redeeming vs. non-redeeming customers within a defined date range to understand how loyalty is increasing AOV. 

Average Time Between Purchases
Ideally a loyalty program should reduce the time between purchases amongst redeemers, demonstrating a more engaged customer base. 

What is considered an engaged loyalty member?

To account for non-active loyalty members, your attribution model should be based on redeemers, not simply members. Signing up for a program can sometimes be a passive action, but redeemers who continuously come back to shop are the engaged members you need to track and understand. It’s critical to understand the motivators that bring customers back so you can double down on these efforts. 

What can we expect this program to do for us in the first year?

In the first year, the goal is to hit around a 5% participation rate and a 7% revenue share in your loyalty program. 

Once you have a growing and critical mass of purchasing customers participating (i.e. redeeming their points) your business will benefit from their higher CLTV since they return more frequently and spend more over time. Ultimately, your engaged member base will boost your incremental revenue, making your loyalty program a more profitable, reliable, and significant revenue stream.

Your partner’s account management team should be heavily invested in helping you reach key success metrics for the first year. After that, you’ll be able to continuously set and adjust KPI targets based on performance and usage patterns.

What are the potential risks and liabilities associated with a loyalty program, and how can we mitigate them?

When it comes to liability, there are two main areas merchants should prepare for: legal liabilities (mainly related to compliance with GDPR and data privacy laws) and financial liabilities. 

Legal considerations may vary by region, but you’ll want to ensure that you invite your legal team into the conversation to evaluate compliance with data privacy restrictions. 

When it comes to financial liability, this can be minimized by strategically setting up your program to reduce points liability. For example:

Only reward customers who have actively opted into the loyalty program.
This reduces liability by not giving out points to all customers, but only those who expressed explicit interest in participating.

Make sure points aren’t left on the table.
Set points to expire or implement auto-redemption offers to ensure points are used in a timely manner. Send reminders to customers before expiration to encourage them to redeem.

Push program engagement and rewards redemption.
Use dedicated email and SMS campaigns to push customers to redeem offers, and remind customers of their current point balance to drive urgency and lift conversion.

Ensure your program is relevant for your business type.
For example, businesses with higher RPRs and lower AOVs should incentivize members with  points-per-dollar spent campaigns, whereas businesses with lower RPRs and higher AOVs could opt to use a punch card campaign to reward customers with a fixed number of points instead.

Ultimately, you should continuously look at how to provide value while maintaining profitability. In the early stages, customer loyalty will be largely reliant on transactional rewards, but as customer behavior changes, you can offer more emotional and experiential incentives (VIP access to early sales, exclusive community events, etc.) 

What’s the best way to account for a loyalty program on my balance sheet?

When accounting for redeemed points on your balance sheet, it’s essential to comply with relevant accounting standards and regulations. This typically involves recognizing liabilities for outstanding points and expenses for redeemed points. However, specifics may vary based on factors like your loyalty program’s nature and applicable accounting standards. 

To ensure accurate accounting, consult with a qualified professional who can provide tailored guidance based on your circumstances and regulatory requirements. You should also regularly assess the breakage rate (the percentage of points that are never redeemed) and adjust estimates accordingly. 

How can we estimate the future redemption rate of loyalty points?

Redemption rates vary based on the business, industry, and program specifics. In general, a healthy loyalty program should have a redemption rate between 8% and 18%. 

The most accurate way to calculate redemption rate is by looking at the number of total points entering compared to the number of points exiting. After one year of an active program, you should be able to accurately predict your rate to create future benchmarks. 

Should points expire?

Yes, points should expire. Generally a best practice is to set expiration based off of “date earned” instead of “last activity” to ensure points expire more frequently and customers are encouraged to return to your site sooner.  Expiration based on last activity increases liability since points of active customers will rarely expire.

Generally, date-based expiration should be set based off of industry purchasing trends. More frequently purchased products should have shorter periods. For example, beauty is usually 3-6 months while fashion, which tends to be seasonal, is set for 12 months. For industries like furniture where purchases are made even less frequently, expiration could happen after more than a year. 

How does a loyalty program align with overall business objectives and strategic priorities?

A loyalty program can impact business objectives and strategic priorities in a few key ways:

Customer Retention
Loyalty programs incentivize repeat purchases and foster long-term relationships with customers, bringing them back to shop with your brand more frequently over time.

Revenue Growth
By encouraging customers to spend more frequently and on higher-value purchases to earn rewards, a loyalty program contributes to overall revenue growth.

Enhanced Customer Experience
A well-designed loyalty program provides personalized rewards and incentives tailored to consumer preferences, bringing customers more perceived value from each interaction with your brand.

Data-Driven Personalization
Data from loyalty programs offer valuable insights into customer behavior, preferences, and purchasing patterns. Leveraging this data can help your team build more targeted marketing, personalized product recommendations, and tailored communication strategies.

What customer data and insights can we expect to gather from the loyalty program, and how can we leverage them to drive business growth?

In addition to measuring the total revenue generated from your program, you can also compare the behavior of loyalty members compared to non-loyalty members (amount of purchases, average AOV, revenue from purchases where redemptions took place, etc.). It’s also important to look at customer LTV metrics (time between purchases, repeat purchase rate, average revenue per customer) and compare how that compares to non-members or non-redeemers. This will help you understand if your program is actually influencing customer behavior. 

Beyond purchase data, you can also gain insights related to brand engagement. For example, look at marketing campaign performance and compare actions, like email open rates or SMS click-through-rates, to see if loyalty members engage more with your communications than non-loyalty members. 

To understand program engagement, keep an eye on participation rate (how many customers redeem) compared to the number of customers who have signed up. If you have VIP tiers, you should also monitor how many customers are in each tier. Ideally a healthy balance to aim for is 5-10% of customers in your top tier, 20-30% in the middle tier, and the rest in the base tier. 

How will a loyalty program impact our pricing strategy, including discounting and promotional activities?

Implementing a loyalty program has a wide-ranging impact on your company’s overall pricing strategy and promotions, specifically: 

Discounting Strategy
Loyalty programs reduce the need for broad discounts by offering rewards exclusively to loyal customers, allowing for more targeted discounting.

Promotional Activities
Loyalty programs complement promotional activities by providing additional incentives tied to specific actions, boosting campaign engagement and overall sales.

Customer Segmentation
Data insights from the program give you the ability to create more targeted pricing and promotions.

What are the potential challenges or barriers to loyalty program success, and how can we overcome them?

Customer participation is one of the biggest challenges since it determines overall program success. With the right strategy, increasing customer adoption is a breeze. Successful loyalty programs prioritize awareness, simplicity and value:

Awareness
Customers may not be aware of the loyalty program or its benefits. To improve program awareness, increase visibility through prominent placement on the website, in the checkout process, and in marketing communications. Run dedicated campaigns to unenrolled customers encouraging them to sign up. 

Complexity
A complicated enrollment process or program structure can discourage participation. Make joining the program a quick, seamless process and make sure rewards are easy to understand and use. 

Perceived Value
Customers may not see the rewards as valuable enough to justify participation, or they may not align with customers’ interests. To overcome this, offer compelling rewards tailored to customer preferences and spending habits, and use customer data to personalize rewards and incentives.

Another common issue is that customers who sign up eventually forget about the program or lose interest over time. After initial adoption, it’s also important to monitor customer engagement. Continuously re-engage program members with personalized offers, tiered rewards, and gamification.

What tech infrastructure and resources will be required to support the loyalty program, and what are the associated costs?

A loyalty program’s core infrastructure is based on a merchant’s platform and software providers. When choosing a partner, it’s important to make sure they have out-of-the-box integrations with the tools you’re using. If you want to invest in creating a customized program, there will be an up-front implementation cost. 

Additionally, you’ll want a partner who has an account strategy team that can guide you to launch with the right strategy and infrastructure. If you work with an agency, you’ll want to invest in a solution that has a robust agency network.

There are also ongoing costs to consider, like the headcount required to manage the program. 

How will the loyalty program integrate with our existing eCommerce platform, CRM, and tech stack?

This varies by partner. Invest in a partner with a robust integration network to create a connected customer experience and reduce implementation costs. How will we ensure enduring program success?

Your partner’s internal team of experts is your greatest asset for success. Invest in a partner with a dedicated account strategy team. Strategists should be well-versed in developing comprehensive retention marketing programs, not just implementing loyalty programs in a silo. 

It’s also important to look for partners who are focused on innovating their product with features that improve program participation (for example, building smarter widgets or on-site modules to increase engagement).

Are there scalability considerations of the loyalty program as the business grows?

It’s important to be mindful that you’re not giving too many discounts or increasing liability. The best loyalty programs test, learn, and adapt over time. Every customer base is different, which is why a program that worked for one brand may not work the same for yours.  

It’s best to start with a base program that focuses on earning and redemption, and then add more complex VIP tiers and earning goals after you’ve had a chance to see how your customers respond. This also leads to a better customer experience, as your program is consistently improving and giving them more value as it grows.

You don’t need to have it all figured out at launch – the best loyalty programs test time sensitive campaigns and rewards, like trying out a punch card campaign for one weekend only to see if it resonates with the member base before adding it as a permanent fixture in your program.  

What contingency plans should we have in place if the loyalty program does not meet our expected goals or if external factors impact its success?

Always start small and grow over time. You can always build a broader program, but it’s damaging to customer sentiment to establish a program and then scale it back or retract rewards. 

For example, you can start with one redemption option at launch, and then build from there. Assess customer response to earning rules and rewards, and roll out VIP tiers once you’ve established and understood the basics. Look for early indicators of engagement in customer interactions and move quickly to adapt your program when you see what’s working for your audience. 

Make sure that you advise with a legal professional on how to create terms and conditions that allow you to scale back a program if needed. And of course, invest in a partner that’s constantly analyzing performance to ensure your long-term success is being supported by program best practices.