Why Measuring Your Customer Investments is Vital to Competitive Advantage

If there’s one thing all brand leaders know, it’s that customers are different. Understanding current and future consumer needs, what they perceive as valuable, and what will resonate each time you engage with them, is a moving feast. 

It’s for this very reason customer loyalty and retention have become business-wide imperatives today. And it’s why grasping the return on customer loyalty initiatives, regardless of whether your brand has a formal program or not, is vital in truly predicting future value.

Tracking customer loyalty not only helps justify ongoing customer retention and advocacy programs, it provides a rich information source for organisations looking to consistently innovate the products and services they offer against their competitors.

Yet in an era when customer loyalty programs are “table stakes” in most consumer-facing categories, there’s still an alarming lack of data insight to help interpret the impact, profitability and success of loyalty offerings, especially against the competition. Many brands simply can’t articulate the impact changes in customer lifetime value are having on their bottom line.

David Parsons, Managing Partner of loyalty and customer experience consultancy Ellipsis, has worked with a number of high-profile Australian brands to build formal customer loyalty programs and customer engagement initiatives.

Ellipsis’ latest offering, Return on Loyalty, taps into external and internal customer transaction data, including transaction frequency and value, share of wallet, and promiscuity in industry category, to gauge what a customer is worth now and in the future. The subscription-based product is supported by consulting services that assist brands to use these data insights in business decision making.

“There is a lot of value in a point-in-time view,” Parsons says. “We need to look behind us not for the sake of looking backwards, but to more reliably predict what’s likely to happen in the future and what companies should do in response.” 

Just how valuable loyalty is

It’s clear customer loyalty programs remain an effective way of building stronger customer relationships. Good programs, if designed well, appeal to a large percentage of a brand’s customer base and are a goldmine for gleaning insights. Importantly, they deliver profitable behaviour change – often off the back of more personalised and relevant customer experiences.

Yet many brands don’t know how to gauge their success. Knowledge gaps include an inability to measure which channels or investments are working, how much to spend, or what to do next.

Parsons points to recent work undertaken with a multi-brand luxury retailer to understand the value of its membership program. After just two years of operation, the return on customer loyalty was 180 per cent. However, returns were predicted to fall to 50 per cent the following year unless fresh incentives were introduced targeting high-value customers.

“What you often find with loyalty programs is the best customers join early,” Parsons explains. “As the program grows over time, the newer cohorts of members are typically less profitable than the earlier members. It’s therefore really important to know how best to dial up and dial down program investments to respond to these types of insights, optimising overall ROI over the life of the program.”

In a competitive market like Australia, for example, grocery shoppers visit at least two competing brands each month, meaning your most loyal customers are still spending frequently with your competitors.

“Customer behaviour is not static, and the costs associated with meaningfully rewarding customers are not static either,” Parsons says. “A loyalty program needs to become a strategic lever for how you engage customers. Having confidence in how you measure the impact and how you allocate more money to keep investing are important factors.”

What makes loyalty measurement difficult is the long-term nature of engagement. In addition, too many brands still view themselves in isolation.

“Unless you see the impact your investment has not only on your customers, but also the wider market, historical performance can be misleading,” Parsons says.

What’s equally clear is you can’t assume consistent ROI once a program is in play. Competitors are investing more, and there are often regulatory changes to contend with, such as those happening in the credit card environment.

What’s helping combat measurement myopia is the rise of the data sharing economy, Parsons says. Unlocking third-party customer insights gives brands a more informed view of the effectiveness of their marketing and loyalty spend. It’s these insights which Ellipsis is working to bring to its clients.

Of course, you don’t have to have a loyalty program to see how loyal your customers are. This same data sharing economy has opened up insights to all. 

Because Ellipsis’ tool is based on a very large, nationwide, data set of transactional spend, the consultancy can supply even non-loyalty program companies with a view of their high-value customers’ behaviour against lower-value ones, Parsons says. They can also see transactional frequency and value, and track a brand’s performance against competitors. 

Loyalty in a business context

With loyalty programs costing retailers as much as 1 per cent of total revenue, being able to measure ROI is a defence against potential spending cuts.

“The wider business needs to believe that in a pretty flat market, those loyalty investments can generate an uplift through new customer acquisition, while influencing current behaviour in terms of spend and retention,” Parsons says.

But there’s another big reason why loyalty is critical to competitive advantage: It’s a platform for strategic business decision making.

“The holy grail of  a loyalty program is that it enables you to make better business decisions, to inform your broader customer strategy, and to evolve your product and go-to-market approach,” Parsons says. “There is a huge opportunity for organisations to leverage the insights they’re getting out of programs in a much broader way.

“For example, innovative grocers are taking customer insights and operationalising those through pricing, how they do promotions, and the products they put in and take out. Airlines are another a great example, where the whole product and customer experience is tied to customer value: The more you fly, the higher up the tiers you go, and the more benefits and rewards you get.

“Those organisations put a huge amount of focus on the insights they get out of their programs. They are a critical input to not only targeting customers and where best to spend money on rewards, but how they should go to market successfully.” 

Ellipsis is working to understand loyalty investment through insights, analytical techniques, actionable recommendations, program diagnostics, benchmarking and optimisation.

To find out more about how you solve the loyalty measurement challenge, download Ellipsis’ free whitepaper, Measuring Retention and Loyalty ROI.