How to Use Cohort Analyses to Ensure Your Loyalty Program’s Success

By Tomi Mester

We all know when it’s done right, loyalty programs are great for retail businesses – and also for their customers. But a true online retail professional is never pleased just by the word “great”. She wants to see the numbers to know how “great” that actually is.

This leads to many questions: how should we measure our loyalty program? What metrics should we look at? What are the benchmarks? What numbers count as “good” or ”bad”?

Retention

Let’s start with the obvious. When you are running a loyalty program, you want your customers coming back and shopping more often. You want to increase your retention.

The math is simple: when you retain customers, you save money on marketing budget (and related costs). You can give back some of that money to customers in the form of discounts/gifts/coupons/etc., so they don’t go to your competitor – where they should “pay” their marketing budget again. Retaining customers is a win-win… in theory.

In practice it’s a win-win only if the repeat purchase actually happens. I want to make this really clear: to evaluate a loyalty program, you should not focus on:

  • how many returning visitors you have on your website
  • how many people have opened your loyalty-program emails
  • how many people have seen your loyalty ads
  • etc…

Of course these numbers are important indicators of other decisions, i.e. did you choose the right email subject line or do you have the right messaging on the right pages.

However, if you want to decide whether your loyalty program is successful or not, you should look at the sales metrics:

  • Revenue
  • Profit
  • Number of items sold
  • Number of sales
  • Number of repurchasing customers
  • Etc…

In retail, retention means repeat purchases.

Choose the right metrics

Focusing on five (or more) different metrics is never good. Pick one or two instead! The best sales metrics always depend on the given business. However, quite often these numbers are highly correlated to one another, so choosing either number of sales or number of items sold will lead to the same conclusion. At this point it’s up to your professional judgement, but if you’d like some more help in the decision, I can recommend following the One Metric That Matters principle.

How not to measure your metrics

Once you know which metric to focus on, the next step is measurement. Measuring retention is always tricky, because of two things: organic churn and seasonality. Let me explain, in detail.

At first sight, how would you calculate your retention rate? (Remember! Retention in this case means repeat purchases.) Many companies – incorrectly – use this simple formula: (eg. for retention rate of March)

The problem is that the result of this equation will be affected quite a lot by the organic churn of your users.

Let’s take a look at the following table:

In the first column you see the different months. The second column shows the number of new customers in the given month (in this simplified example, we’re using 100 for each month). The third column shows how many of those 100 customers came back and bought something in the Go to the full article.

Source:: Business 2 Community

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