You actually can put a dollar value on loyalty. Cross-industry studies indicate that even a 5 percent reduction in churn can pay you back with an increase in profits of up to 125 percent. This may seem incredible, but loyal customers conduct more transactions and refer more of their friends. With all the pressure banks have been under to reduce costs and grow memberships, customer loyalty programs have proliferated. Yet not all bank managers are satisfied with their ROI for loyalty programs.

Dissatisfaction With Loyalty Programs

In a study of loyalty program managers by Forrester, only 13 percent of banking industry professionals were satisfied with their loyalty programs. In contrast, 15 percent were “somewhat or completely” unsatisfied. Two-thirds were either only somewhat satisfied or indifferent.

One of the problems is that many managers underestimate the costs associated with implementing a customer loyalty program. Lack of preparation can lead to the introduction of a program where the rewards given out are too expensive or one that frustrates customers because the goals are too hard for them to reach.

5 Categories of Costs

The first step in building an effective program is taking a bird’s eye view of the expenses. There are really five main categories of costs associated with creating a digital loyalty program: software, design, marketing, rewards and integration. Each area needs to be developed carefully in coordination with the others. Here’s how.

Software Costs

The costs of software to manage your loyalty program software tends to be small compared to the reward costs, but they must be included in ROI calculations. This software can be designed in-house or purchased through a subscription or partnership with a loyalty/engagement provider.

Design Costs

Like the above category, these are costs associated with preparing the program in-house or calling in the services of a loyalty/engagement program provider.

Marketing Costs

The program can’t be successful if your members don’t know about it or know how it works. Make sure you spend enough for adequate coverage to get the word out about your program. This may mean broadcasting spots in all major communications and social media outlets. It’s also a good idea to encourage customer-facing employees to mention it regularly. The cost of employee-based marketing is minimal.

Reward Costs

This is normally the biggest portion of the costs. Your average transaction price is an important factor in determining a good reward. It is also a great practice to use promotional items or high-stock items for a reward to keep inventory levels low or really push what you want to sell. Most of all though, you want to offer a reward that the guest will desire in order to get them to sign up.

Integration Costs

You must include other costs associated with loyalty programs as well, and they may not be obvious at first. Consider costs associated with integrating the loyalty software with your network and the cost of new initiatives needed to make the loyalty program run smoothly. For example, consider the expenses incurred in signing up new users. In many cases, you need to staff a kiosk in the bank for users to sign-up, check-in on their points, ask questions and so on. This category also includes texting charges applied to mass text messages sent to subscribers introducing the program or promoting events. These charges are normally paid per text and sent to the software provider.

The ROI Formula

Here is an effective formula for calculating the ROI of a successful digital loyalty program:

ROI = (Revenue from increased visits from loyal guests) + (Revenue from mobile alert messages & bounce back redemptions) + (Revenue from automated retention) + (WOM referrals, reviews, social, etc.) + (revenue from insight-based campaigns) – (Total costs of software, design, marketing and rewards redemptions).

As you can see, it can take years for the revenue to outpace the costs, but once they do the impact on the bottom line can be enormous. Be patient, talk to your customers about their view of your loyalty program and never stop improving. There’s no reason your business can’t reap the kind of enormous rewards from the cumulative effect of loyal customers.