When done right, loyalty programs can be an effective way to re-engage lost customers, develop deep customer loyalty, and create brand advocates.
When done poorly, loyalty programs can be boring and disengaging, and might actually have the opposite effect of building loyalty.
In this post I’ll show you how to use metrics to objectively determine if your program isn’t performing well, and what the root causes of these issues are.
Keep in mind that the metrics we give are averages, and you should research & adapt these for your particular industry and customers.
These metrics are only relevant for loyalty programs that have been running for a while. If you’ve just started a loyalty program, wait until your customers have had enough time to fully engage with your loyalty program before you make any decisions.
Breakage Rate >40%
Breakage rate is the percent of points issued that do not get spent. This is usually caused by points expiring, or by customers just not having enough time to spend points (yet).
Ideally, you’re looking for this to be less than 20%. If you have a breakage rate higher than 40%, you most likely have a breakage issue that is undermining the performance of your program.
How to calculate breakage:
- Find the total number of points that have not been spent, ever.
- Find the total number of points issued, ever. This includes expired points.
- Divide the total number of points that have not been spent by the total number of points issued, ever.
For a more advanced analysis on this, read our guide to loyalty program breakage.
Redemption Rate < 20%
The redemption rate is similar to breakage rate, except instead of looking at points that don’t get used, it looks at what percent of customers do spend their points.
We can’t expect every single point to be spent, but we want the redemption rate to be more than 20%.
Remember: redemption is good – it means that customers are spending their points and getting rewarded. They are getting associating positive emotions with your brand and your loyalty program, and they’ll be much more motivated to do things for points in the future.
How to calculate redemption rate:
- Find the total number of customers who have ever spent points.
- Find the total number of customers who have ever earned points.
- Divide the total number of customers who have ever spent points by the number of customers who have ever earned points.
What Causes Loyalty Program Ineffectiveness?
1. Bad Rewards
Just offering a reward is not enough for a customer to be motivated by points. You need to make sure that the reward a customer is working for is something they actually desire, not necessarily something that is inexpensive and convenient for you.
2. No Company-Wide Buy In
If your entire organization isn’t 100% behind loyalty, this will show in your customers’ loyalty program participation. Customer-facing employees should be mentioning loyalty at every opportunity. Marketing teams should understand loyalty and incorporate it in other promotions. For example, a "Black Friday" promotion should be well integrated into your rewards program.
3. Expiration Window is Too Soon or Too Long
If points expire too soon, customers won’t have enough time to spend their points and receive the reward that they have been working towards. This means your loyalty program is demotivating your very best customers. It also means that customers are no longer motivated by points since they haven’t received a reward, and they know that they won’t be able to get one.
If points take too long to expire, customers won’t have any reason to spend their points sooner rather than later. Just like most promotions, people are more likely to take action if there is a time limit on when they can take the action. For more information on expiration dates, read Should Loyalty Points Expire.
From what I’ve seen in the loyalty industry, most merchants set their expiration too early instead of too late.
4. Not Rewarding Actions
If customers are only rewarded for orders, it is more difficult to get enough points to spend. What if a customer is a few points short of a reward?
There are other forms of value that loyalty program members can provide other than purchases, most of which are revealed the further they get on the customer journey. For example: industry influencers and brand advocates can bring you new customers, even if they aren’t directly spending. They should be rewarded for referring others and sharing your products and promotions on social networks.
Your customers are more than just purchasers, so reward them for more than just purchases.
5. No Visibility
If customers don’t even know you have a loyalty program, it’s doomed to underperform. Other than employees not promoting your program (cause #2), here are some areas you can promote an ecommerce loyalty program:
- a loyalty program explainer page
- promotional and transactional emails
- reminder emails
If your program is underperforming, don’t feel overwhelmed; now you have a baseline to work against and improve! Even more so, you will be able to track the improvement you make to your loyalty metrics and correlate these to other important business metrics like average order size, revenue, and, and repeat purchases.