Merchants evaluating loyalty programs can get a head start by analyzing how these five factors impact their business.

Investing in a customer loyalty program represents an important opportunity for merchants. To ensure smart decision-making, merchants should understand how a new customer loyalty program will affect their business. Here are the five most important factors to consider:

1)  Get a sense of estimated customer acquisition cost (CAC) and customer lifetime value (LTV)

Let’s look at these two terms quickly before discussing why they’re important for merchants looking to launch a loyalty program:

• Customer Acquisition Cost: the amount of money a merchant has to pay to earn a customer purchase. For a rough estimate, add up all monthly sales and marketing expenses and divide by the number of customer transactions from that month. As a business becomes more sophisticated, each campaign will have its own cost and return, which determines where marketers should allocate budget.
• Customer Lifetime Value: the amount of revenue each customer drives for a business. For a rough estimate, take average transaction size and multiply by the estimated number of repeat visits in a calendar year. As a business becomes more sophisticated, customer revenue and repeat visits will become concrete terms.

Customer acquisition cost helps determine how much budget merchants should set aside to invest in their loyalty program. Essentially, loyalty programs increase revenue from existing customers (versus acquisition which earns money from brand new ones). Due to a closer relationship, retention marketing has proven to be significantly more cost effective, meaning that a relatively smaller investment in loyalty marketing can produce a higher monetary return.

The whole point of a loyalty program is to increase customer lifetime value, either by increasing average check size, frequency of customer visits, or both. Strong loyalty program providers will be able to provide detailed analytics explaining exactly how much retention marketing increases customer lifetime value for the business.

2) I can define a “loyal” customer

Having a sense of what customer loyalty actually means determines the incentives a business should use to retain customers and increase lifetime value. Consider how many repeat visits or how much total spending would separate loyal customers from discount-chasers, while also keeping in mind what remains an achievable goal. As a rule of thumb, start with the amount of money that the average individual customer would spend after 8-12 visits.

Smart merchants will take the next step to figure out what non-monetary incentives will drive program success. Experiential rewards such as exclusive access to products, brand collateral, or events can all dramatically change customer behavior without discounting brand value.

3) I understand how I would benefit from access to more customer data

Retention marketing is valuable because it creates more data insights for merchants. The capacity for personalization, targeting, and other 1-to-1 customer engagement dramatically increases once a program is up and running.

As a result, think through exactly how data would help improve business operations before committing to launch a loyalty program. Knowing how much an individual customer has spent and at what location is one thing. It’s another to know exactly what to do with this information. Loyalty technology is powerful on its own, but execution separates successful programs from ones that don’t quite produce the desired impact.

4) I want to improve communication with customers

Though not always the main focus of a loyalty program, customer communication is a key benefit. Collecting customer feedback becomes much more impactful when merchants know which type of customer submitted that feedback, at what location, and at what time of day. Context makes it easier to know how to respond.

In addition, tracking customer feedback through a loyalty program serves as a useful tool to analyze customer satisfaction metrics like Net Promoter Score. Real-time insight into satisfaction helps a merchant keep his or her thumb on the pulse of the business.

5) I would like to increase revenue from existing customers

Engagement, communication, and data are all nice-to-haves, but the one must-have is more revenue. Work through customer retention business models for your business to understand the type of benefit that a loyalty program can produce.

For example, if a business’s average check size varies very little across locations, then the loyalty program should focus on driving more customer visits. If average check varies across locations, then use the loyalty program to spur higher customer spending.

Retention programs have the ability to increase revenue from existing customers by 30-50%. By preparing before launch according to the above five factors, merchants can ensure they capture this level of success.