If you are a loyalty marketer, either a consultant, an internal team member, or a service provider, you are constantly asked to justify the value of your role.  Loyalty marketers are an easy target for skepticism, because it is difficult to prove their value compared to what would have happened in their absence.  Here are three ways that marketers can use customer lifetime value (LTV) to quantify the value of loyalty programs.

1. Compare LTV of Members and Non-members

Watch the LTV of members from the time they sign up and continue in the program.  Does it trend up even with the occasional giveaway?  How much more valuable does a customer become after they join the loyalty program?  Does the total increase in value of the loyalty member base exceed the cost of implementing the program in the first place?

Other options may available to retailers to differing degrees.  It comes down to a company’s ability to attribute transactions across visits to the same customer.  E-commerce retailers will likely have an email address to connect purchases.  Some retailers use a phone number, address, or even a hash of the credit card to connect different transactions.  Larger retailers may enlist a market research firm to survey their customers’ purchases over time.  These methods can enable you to calculate the real difference in lifetime value for members versus non-members.

There are caveats to this.  Do not expect that loyalty members represent a random sample of a full customer base. There is an inherent adverse selection problem with loyalty programs.  The customers that know they are the biggest spenders have the strongest incentive to join in order to later earn potential discounts for items for which they would have otherwise paid full price.  Conversely, infrequent customers that a brand may hope to influence through a loyalty program would derive less value from it and be less incentivized to sign-up in the first place.

2. Watch LTV Trend by Cohort

Are the customers coming onboard during the holiday rush more or less valuable than customers brought on three months earlier?  What does that inform for future acquisition strategies?

A cohort of members is grouped based on all joining at about the same time.  This type of segmentation groups people who are at the same point in their lifecycle with a store or loyalty program while normalizing for factors like economic conditions, competitor activity, or seasonality.  Over time it is possible to see differences in customer lifecycle from cohort to cohort and then to find drivers of positive behaviors like the introduction of a new menu, new media programs, or the mobilization of a website.

Often members of a cohort will be receptive to the same type of promotional message around the same time in their lifecycle with a company.  By watching the LTV trend of a cohort, it is possible to measure the relative impact of no promotion (control group) compared to the net value of offering different types of rewards.

3. Trial Offers To a Trackable Group

Loyalty marketers are inherently customer centric.  The center of their data model is the customer.  The fundamental metric of customer centricity is customer lifetime value.  If a loyalty program is not obsessively tracking LTV, then it is extremely difficult to assess the value contribution of the program.

Since a loyalty program generates so much great customer data,  it is the perfect sandbox for trialling new offers in a measurable environment before rolling out to a larger, less trackable audience.  Before offering a 2-for-1 promotion to the public, measure its impact on net customer lifetime value within the loyalty program.  That same promotion may do better framed as a 50% off offer.  Test it within the loyalty program.

This type of research is often costly, time-consuming, and the subjective topic of much debate in the absence of data.  This is an excellent application for loyalty marketers to bring hero insights by mastering customer lifetime value for an organization.

The truth is that there are some loyalty programs that are valuable and others that are costly.  Smart loyalty marketers should be able to demonstrate value contribution, and monitoring customer lifetime value, and changes to it over time, is the best way to quantify the financial impact of running a loyalty program.