How to estimate loyalty program’s Return on Investment

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There are two common reasons why customer loyalty strategies fail:

• Either the customers do not see enough value in participating.
• or the company cannot financially sustain the program.

A low-cost return preserves the company’s profitability, although it leads the customers to feel that the brand does not appreciate them enough. On the other hand, high-value rewards are mean to drive sales in the short-term but ultimately can harm business profitability. In both cases, customer loyalty and customer engagement are negatively affected.
One useful online ROI calculation tool, like Qivos’ tool, can easily help you calculate the return on investment of a loyalty program for your business.

Let us dive deeper into the issue and examine that the estimation of the reward program’s viability can make a significant difference between positive acceptance from the customers and members’ frustration.

Consequently, how do you choose rewards that are substantial enough to motivate customers, but will not damage your profitability keeping the program financially sustainable? Before you begin with the implementation of a loyalty program, make sure that you have estimated the return on investment (ROI), to prevent stopping the loyalty program under financial pressure.

A common rule to follow is that the rewards program should ensure that the customer’s lifetime value (LTV) exceeds the cost required to acquire it (CAC). Another significant calculation is the value of the reward cost.

The ROI calculation formula of a loyalty program is LTV – CAC / CAC.
If the return on investment is greater than 1, then the programs’ structure is profitable. Besides, the KPIs ratio should be around 3. This, in some industries, is expressed as LTV: CAC.
LTV: CAC ratio greater than 5 let us know that you spend a lot less than you could, and this leads to the deceleration of the programs’ growth.
LTV: CAC ratio of less than 1 let us know that the program is not profitable and is likely to lead to financial problems in the future.

You can download Qivos white paper, with additional information, examples, and formulas for calculating the ROI of a loyalty program, by clicking here.

Author: Fani Charmpi, Qivos’ COO

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