Customer Loyalty Program: A Complete Explanation

We know that a significant number of companies launch loyalty programs without conducting any calculations or checking results. Additionally, some of them lack a clear understanding of how these programs work. However, it's crucial to optimize the performance of such programs. Let's explore this further.

How Do Loyalty Programs Make Money?

We use cohort analysis to understand the financial aspect and core logic of loyalty programs. Let's take a look at our example:

We have two cohorts: one with an implemented loyalty program and another without any programs. These cohorts demonstrate how people who joined in month 0 retain month by month. In our case, we calculate Revenue Retention, but you can calculate other metrics such as visits and usage days instead of months (or quarters, or even years).

Each month, we experience some churn, which refers to users naturally leaving our product over time. This is common in most industries, including b2b, retail, or banking.

The main goal and benefit of a loyalty program are to reduce this churn and increase customer retention rates. As we can see, there are significant differences in the churn rates between the cohorts. The cohort with the implemented loyalty program has a lower churn rate.

However, we must also consider the second crucial point, expenses incurred on bonuses, discounts, or other incentives. Our statistics table shows that the "With Program" cohort's monthly expenses are $1129, $1254, and so on.

In total:

• The cohort with the program brought in $94,329 in revenue over 6 months (a significant advantage).
• The cohort without the program brought in $75,685 in revenue over 6 months.

Let's assume that we spend 25% of our revenue on our goods (COGS). Therefore, our gross profit is calculated as follows:

• Cohort with program: $94,329 * 75% = $70,746 (improved brand loyalty and better customer retention).
• Cohort without program: $75,685 * 75% = $56,764.

Additionally, we need to subtract the expenses incurred on bonuses:

• Cohort with program: $70,746 - $7,584 = $63,163.
• Cohort without program: $56,764.

Conclusion: The cohort with the loyalty program exhibits an 11.27% uplift in gross profit over the 6-month period.

How to choose a loyalty mechanic

The simplest solution is a points-based Loyalty Program. Customers earn bonuses through spending. It's simple for customers and companies alike.

Booking Genius (Tiered Loyalty Program):

One important benefit of tiered loyalty programs lies in behavior management. If you deeply understand which proxy metrics drive financial metrics well, you can grow them through such complex programs. For example, you can convince your customers to try new products each month.

Moreover, a tiered loyalty program offers customers a sense of achievement and progress. It taps into their need for mastery and progression as they strive to reach higher tiers for valuable rewards. Gamification principles, like progress bars and unlocking badges, further enhance customer engagement and motivation.