Customer Lifetime Value for Loyalty Programs

customer lifetime value

Determining the lifetime value of your loyalty program customers is a necessary requirement of reporting for successful loyalty programs. You must understand that LTV is the metric that matters when it comes to loyalty program members vs your normal customers.

Loyalty Program LTV

Your loyalty program members should have a higher LTV than your regular customers. If you have segmented them as loyal, you should be seeing the benefit of their loyalty in your overall return. Lifetime value should be somewhere around 15-40% higher than the LTV of your average customer. Having this loyalty benchmark will help you gauge your growth and expansion of your program, and also help you segment your program over time.

How to calculate lifetime value of loyalty customers

The first step of calculating LTV is to bring data to understand your investments, costs, and revenue from your loyalty marketing campaign. We have laid out a sample table below. The lifetime range we are looking at in this equation is three years. Why three years? Three years is a realistic time frame in which to base economic outcomes. Expecting every loyal customer to last 10 years would be great, but would create outrageous revenue projections that would not be sound from a forecasting perspective.

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Note the projection in here needs to be applied to your own numbers.

VALUE CURRENT YEAR NEXT YEAR THIRD YEAR
Members 50000 42,500 36,125
Loss (15%) 7,500 6,375 5,418
End of Year Actives 42,500 36,125 30,706
Revenue  $6,821,300 $5,798,062 $4,928,313
Costs (30%) $2,046,390 $1,739,418 $1,478,493
Reward Costs (8%) $545,704 $463,844 $394,265
Total Cost $2,592,094 $2,203,262 $1,872,758
Profit $4,229,206 $3,594,800 $3,055,555
Discount Rate 1 1.1 1.14
Net Present Value $4,229,206 $3,954,280 $3,483,332
Cumulative Net Present Value $4,229,206 $8,183,486 $11,666,818
Member Value $84.58 $163.67 $233.34

 

Reward Cost, Discount Rate, and Net Present Value

These three items are some critical numbers that affect the true value of your subscribers. Reward cost will be a variable based on your reward structure. The point being, that you need to add your total cost of your program. Discount rate is the rate in which your money matures, and helps account for the “bird in the hand” idea of capital investment. And lastly, the Net Present Value is the cumulative value of your loyal customers today, two, or three years into the future using the previous collected calculations.

Making Sense of Lifetime Value for Loyalty

Taking these numbers should give you a good basis to understand how valuable your loyalty program customers are. If you are not getting the right numbers, you need to unpack what the “right” numbers are based on your program. If your program is inclusive, then it won’t be much higher than your average customer. Additionally, you might want to run this exercise to understand what attributes make up your most loyal customers. We can help with your loyalty program review.

Best of luck with your loyalty program reporting!

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