Changing the Retail Game With the Loyalty Measurement Triangle

Retailers play a fast-paced game in which their success — or failure — is measured by yesterday's sales. To stay in the game, the best retailers measure the results of all programs in every area, including operations, merchandising and marketing. Smart marketers calling for a loyalty program need to respect that mind-set, but can gain acceptance on a new set of rules using the "loyalty measurement triangle."

Different Game, Different Rules
Retailers are used to measuring everything, so when they decide to launch a loyalty program, they want to see return on investment on the program immediately. Loyalty programs don't play by those rules: costs are up front and benefits appear in the future. Worse yet, staffs are generally lean and they're not typically trained on measurement in the first place. Even with a full staff trained in measuring different types of programs, traditional ROI on loyalty is difficult to capture and communicate for several reasons:

• loyalty is usually how transactions are identified, so holding out customers is often impossible;
• the benefit of a loyalty program isn't immediate, rather it manifests itself in more visits over time;
• strong results among a small amount of loyalty participants doesn't offset declining business of the rest of the base; and
• organizations are uncomfortable thinking in terms of customers instead of products.

So it's no surprise senior executives get frustrated trying to pin down the exact value of a loyalty program. Studies show that almost half of surveyed companies list measuring market value and effectiveness as one of their top challenges in program execution. Not knowing the true value of their customers’ loyalty is universally frustrating for retailers.

Being able to pin down a traditional ROI doesn't mean there's nothing to measure, however. Like a NFL official who uses multiple replays to assess a play, loyalty program value can be triangulated by looking at multiple sources and metrics.

The Loyalty Measurement Triangle
Selling this perspective starts by remembering the source of executives’ frustration: expectations and understanding. Senior executives understand traditional ROI from other areas, so it can be challenging to suggest a different form of measurement. When new metrics are introduced, executives don't know how to tell good from bad. Getting them to accept this solution depends on how well you pre-sell the concept. That's where the loyalty measurement triangle comes in.

Look at these three sides of the triangle to assess your program:

1. Shifts in attitude and category usage. Have loyalty program members started shopping more from your store? Are they looking to your store for more needs?

2. Shifts in consumer value equation. The value equation is how often a customer visits, how much they spend per visit and how many customers come in. Looking at shifts in these metrics among members is a great first step in assessing value. Customer retention is often one of the first changes seen that adds real value to an organization.

3. Shifts in advocacy. Are loyalty members more likely to recommend your services to a friend? Are members willing to consider you for services you don't currently offer?

Before moving ahead, establish clear expectations to define success. These will differ depending on the industry, competitive landscape and maturity of the program. It's not enough to define what success looks like now; set expectations for what it will look like in the future.

Measurement will still be difficult and the loyalty triangle doesn't guarantee success. In fact, the metrics under the three areas will likely be different for each company. But changing the rules is the only way you can really succeed. The key is to realize that different measurement is needed; the round peg of traditional ROI often doesn't fit this triangle of loyalty programs.

Recognizing the difference and freeing your loyalty program of rules that don't fit will let you measure in different areas and gain a triangulated view of the program. It's a game changer. Ultimately, this shift will make measurement more powerful, easier to communicate and allow marketers to better respond and adapt to the perspective and measurement their loyalty programs need to succeed.

Dennis Goodman is director of loyalty programs at 89 Degrees, a customer engagement agency. Dennis can be reached at goodmand@89degrees.com.