While it’s no secret that loyalty programs can drive revenue and customer engagement, companies should never simply trust that their program is accomplishing either of those objectives.

Instead, the pulse of their loyalty program’s productivity can be measured in a variety of ways. These metrics take into account subtleties such as customer retention rates, how much money each member generates for your business throughout the course of their engagement with your program, and the percentage of total points that gets redeemed (a strong determinant of loyalty program liability).

Using these tools and more, you can acquire a much clearer picture of your loyalty program’s status and how successful it is. Let’s explore the best ways to gauge the effectiveness of your loyalty program.

Customer Lifetime Value

 Customer lifetime value (CLV) is an index of how much liquid capital a customer will produce for your company over the course of their interactions with it.

Large, positive numbers with momentum trending upwards indicate a healthy and effective loyalty program. Conversely, should a significant percentage of your members demonstrate a negative CLV, this might be an indication that your program’s framework and promotions are in need of a change.

Most importantly, CLV can serve as a wake-up call for companies whose less-than-optimal loyalty programs might be jeopardizing their chances of retaining clients for the long-term. Acquiring new clients can be up to 25 times more expensive than maintaining existing ones, and low CLVs can provide invaluable insight that, if needed, can save companies an unnecessary cost burden.

Customer Retention Rate

 An ideal customer loyalty program keeps customers engaged and encourages them to stick around. The simplest way to measure this properly over a given period is to use the formula below:

Customer Retention Rate = (Ending Customers – New Customers) / Initial Customers x 100

If your customer loyalty program is correctly engaging customers, it should not only get them to come back and redeem their points, but also make new purchases from which they’ll accrue new points that will incentivize them to return at a later date. Loyalty programs in which this cycle is routinely happening should demonstrate high customer retention rates.

Additionally, high customer retention rates can help to absorb loyalty program liability, as they provide revenue to reconstitute that which is lost in fulfilling performance obligations for redemptions.

Ultimate Redemption Rate

 Your ultimate redemption rate, or URR, is a critical component in the development of an accurate breakage model. In addition to this, it also serves as a indicator of whether customers like what your program offers.

If redemption rates are low, this is a sign that customers are not motivated to cash in their points – signifying your offerings are not bringing them back to your business.

The Bottom Line

 There are several angles, such as the values for CLV, URR, and customer retention rates, that can serve as key performance indicators for your loyalty program. With the help of these benchmarks, your company can discover which aspects of your program are most effective, and which can be reconfigured to produce better results. And always make sure to use advanced analytics techniques to measure the overall performance of your loyalty program.

How is your program measuring up, and which areas can you strengthen to make it more competitive?