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Measure loyalty programs by more than ROI

ROI analysis only provides part of the equation in measuring ROI of a loyalty program. Companies should also measure causality.

When examining the results of a loyalty program, there's more to measuring its success than ROI alone.

Instead of focusing on the return-on-investment equation, which is the standard "revenue minus investment expenses equals return," Will Wittkopf, a consultant with Carlson Marketing Worldwide's Decision Sciences group, recommends a focus on two elements of the equation: causality and incrementality. According to Wittkopf, these elements will define the success of customer loyalty programs better than tracking investments and revenue.

Wittkopf defines causality as the ability to trace a clear link from a program initiative (such as an email marketing acquisition campaign) to an observed outcome or result (new members acquired, increase in intent-to-purchase score). Failure to establish causality can lead companies to attribute too much or too little revenue to a loyalty program.

Causality will add to the weight of such values as sales lift or customer satisfaction because it sets up a clear connection between a program initiative and its results.

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"Without knowing what caused a change in consumer behavior and what did not cause a change in consumer behavior, there's no room to make program improvements and little hope of achieving success," Wittkopf said.

Incrementality is the ability to know whether a program initiative is delivering the right outcomes. For a loyalty program to show real results, it must show that the results being measured are incrementally better than those generated without the program. Would the consumer have behaved the same way (e.g., recommended your program) and driven similar benefits (e.g., attracted a new member) if he were not a member of the program?

According to Wittkopf, marketers who use ROI alone to measure their loyalty programs may not properly account for the cost to serve individual program members. To calculate the aggregate cost-per-transaction measures and attribute them back to groups of customers, divide the cost of a television ad by the number of customers in the viewing area. Taking cost allocation to individual members is more difficult. One way to tackle this is to use Activity-Based Costing, which calculates a customer's cost-to-serve, especially across markets with competing objectives and conditions.

"To put all the pieces together for your program, start by defining success," Wittkopf said. "With success clearly defined, design a measurement plan that meets the criteria for that success." The ideal measurement plan will allow for generalization, reduce or control bias, isolate causal factors, and establish causality and incrementality, he says. If there are operational constraints that prevent what Wittkopf cites as ideal program measurement, he suggests using alternative design and sampling methods to get the job done.

Reprinted with permission from 1to1 Media. (c) 2006 Carlson Marketing Worldwide.

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