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There are no two ways about it: the economics of loyalty programs are hard to manage. Harder, still, is making decisions that have a real, long-lasting impact on incremental value. If you haven't yet, check out parts 1 and 2 of this 3-part loyalty finance blog series — we cover must-know finance details and ways to measure program value in more ways than liability.
When it comes to making decisions about your program's future, turn to these seven tactics to help you maximize the economics of loyalty programs:
Not all loyalty program members are created equal. For example, consider two very loyal members that buy from you every month. Member 1 spends $5 with you with you each month, while member 2 spends $500 each month. Clearly, the second member’s loyalty is much more valuable.
Customer Future Value (or CFV) data allows you to differentiate this value across members. With CFV, you can clearly identify your highest value members. In fact, for most programs, 20% of members will drive 80% of the value. Therefore, identifying which members belong in this all-important 20% can go a long way to ensuring that your program is able to realize its value.
High CFV members are already loyal customers, and targeting members with high CFV can be an effective strategy to protecting your expected future profits. Remember, their impact is highly leveraged — 20% of members generally drive 80% of the value, so successfully targeting this minority of members can have a large long-term impact on program ROI.
But how do you identify this small, impactful group of members?
KYROS' loyalty finance dashboard gives program managers unprecedented insight into the current and future value of individual program members, so you can harness the economics of loyalty programs and engage with your most valuable, high-potential participants to maximize ROI.
A key goal of a program manager goal is driving incremental value, which ultimately leads to increased member equity. The simplest way to drive incremental value is to increase a member’s CFV, making it highly useful to be able to predict which members are most likely to see an increased CFV should they be given a small nudge.
Customer potential value (CPV) is the metric that KYROS puts in the hands of program managers. It measures how a member’s CFV increases as their engagement level increases, and is derived from the same models used to quantify CFV.
A large CPV indicates an opportunity to drive significant incremental value, as just a small investment in member engagement can drive a large increase in CFV.
Many companies have churn models that predict the probability of churn. These models are incredibly powerful in supporting “defensive” strategies (like retaining customers at risk of lapsing), and CLV models enhance these capabilities.
A decrease in CLV for a given member is a predictive sign of an increased likelihood of churn. It implies that the models expect a member to be less loyal to the brand over their remaining life as a member.
In terms of the economics of loyalty programs, it’s more important to prevent a high-value member from lapsing than a low-value member. In fact, if a member who isn’t expected to provide you a lot of value is going to lapse, it may not make economic sense to invest in keeping them around.
Quantifying the dollar value at stake for each member allows you to be smarter about who you’re targeting to prevent churn, so you invest your time and energy in retaining only the members who make the most economic sense to invest in.
Typical segmentation methods simply group members with a common set of traits. Companies often group members based on historical behavior.
But this approach fails to predict how members within a segment will behave in the future.
CFV and CPV can add this dimension. Since CFV and CPV are estimated at the individual member-level, it’s easy to calculate the average CFV and CPV across all members in each segment. Tactics 1 through 3 can then be applied at the segment level to drive incremental value.
An even more powerful way to combine segmentation and CFV/CPV is as follows:
This approach allows you to use CFV and CPV to identify who to target, and then use your current segmentation/marketing personas to figure out how to target them. Pairing smart segmentation tactics with KYROS' ongoing performance monitoring dashboard allows program managers to learn more than ever about detailed trends and forecasts for the member groups that matter most to their bottom line.
Long story short, it makes good economic sense to spend more time, energy and money to ensure high CFV customers remain happy when issues arise.
To be sure, we are not suggesting you only provide good service to high-value members; there is a baseline of quality service that should be available to everyone.
But putting CFV data in the hands of your customer service representatives (paired with sound customer service policies around how to use CFV) is a powerful way for companies to identify when to provide “enhanced service” and, should the situation call for it, how much monetary value to assign to repair the situation. Deploying this information at scale can go a long way to protecting significant amounts of future profit.
Smart companies are constantly evolving their program structure to better meet member needs. CFV can help these companies decide on a program design that makes the most economic sense. Three steps are needed to make CFV-driven program decisions:
The best way to identify potential program changes is to empathize with your members’ wants and needs, using these insights to inspire new program design ideas. Since not all members represent equal value, CFV is the perfect metric to identify which high-value members to study. That said, if the goal is to drive value among members who may increase in value given the right 'nudge', CPV is the metric you want to use to identify which members to study.
It’s important that the program changes be evaluated in terms of incremental value, as this provides a holistic analysis of the cost-benefit trade-off. Unfortunately, many companies put more focus on the cost of the program changes, likely because the appropriate value metrics are not readily available.
That's where KYROS can help.
KYROS provides the tools program managers need to get real insights into their program's performance. From individual CLV and member breakage models to a comprehensive array of both cost AND benefit data, loyalty programs can see a new level of optimization between risk and reward.
Finally, the CLV family of metrics is an invaluable tool to align marketing and finance, as it provides a common framework to understand the economic value of your loyalty program and how to optimize it.
Every finance team that supports a loyalty program will already have the program costs clearly quantified because financial reporting regulations require it. But most finance teams lack a trusted metric to understand the value gained in exchange for incurring this liability. This lack can lead to a cost-containment mindset, simply because costs are highly tangible.
The CLV family of metrics allow finance teams to properly weigh the cost-benefit trade-offs, enabling a fluid, value-driving relationship between them and program marketers and refocusing the the organization around value maximization, rather than cost minimization.
The key to maximizing your program's long-term value is simple: understand current and future trends of the programs individual members. Doing so allows you to invest smarter and optimize program design for the biggest ROI impact — but it's hard to achieve without intelligent, data-driven tools.
Whether it's a broad snapshot into trends and behavior or a more granular understanding of rewards performance, the KYROS dashboards provides unprecedented insight into the current and predicted future value of your members. Schedule a consultation with the KYROS team to see the dashboard in action.
Founder and managing partner of KYROS Insights. I'm an analytics nerd and recovering actuary. I use machine learning to help loyalty programs predict member behavior so they can identify their future best customers, and recognize and reward them today.