The cost of lost customer loyalty

I’ve had the pleasure of working with a wide spectrum of brands and businesses on their customer loyalty strategies and specifically their current and future customer loyalty and rewards programs.

When we discuss measures of success, the common measures defined are focused on ‘growth and gain’. In general terms, they are:

  1. Increasing member volume and contactability
  2. Gaining more behavioural insights for personalised member interaction
  3. Increasing revenue (profitably) through incremental spend and frequency of visit
  4. Increasing member lifetime value (vs non member)
  5. Increasing tenure
  6. Increasing active retention
  7. Increasing positive return on loyalty investment
  8. Increasing % of loyalty revenue vs total revenue
  9. Increasing program interaction and communication measures

These measures are fundamental to maintain a profitable and sustainable loyalty and rewards program strategy.

However, a measure not often mentioned (if at all) is reducing the ‘cost of lost’ members.

Know the ‘cost of lost’ members. Reduce the ‘cost of lost’ members.

How do you calculate the ‘cost of lost’ members?

Step 1: Define what a ‘lost’ member is?

  • To keep it simple, use unsubscribes from communications as the definition of a lost member.
  • This is not the purest definition as an unsubscribe could be a… ‘stop sending me the communications’ rather than ‘I don’t want to be part of the program’.
  • However, an unsubscribe from a communication loses the opportunity to communicate and motivate a behaviour (spend or visit).

A ‘lost’ member = unsubscribed member

Step 2: Calculate the future value of a member or lifetime value

  • Losing a member means you lose the opportunity for future incremental revenue
  • You can do predictive modelling or you can use past spend behaviour as an indication of future income and allocate a time period in the future
  • You can also calculate the net future value (ie future value less cost of rewards)

The value of a member = potential spend in the future

Step 3: Calculate the cost to acquire a new member

  • Calculating the cost to acquire a new member is based on the costs you can attribute to enrolling a new member.
    • With a new program to be launched, this could be based on adding all costs associated with development and launch of a program including people, technology, marketing
    • Add ongoing costs eg rewards, people, marketing, technology
    • At the end of year one, attribute the total cost (setup and ongoing) to the number of members gained. (To keep it simple, the number of members gained is the total gross number of members enrolled rather than active members)

The cost to acquire a member (defined period eg 12 months) = development and launch costs + ongoing costs / number of members enrolled

Generic example:

For the financial folk reading this article, I accept there are many variables and more specific considerations in calculating the ‘cost of lost’ members. This example is provided purely to bring to life the need to measure the ‘cost of lost’.

End of year 1:

Number of members enrolled: 100,000 Number of unsubscribes: 3% = 3000
Net future value: $500 per member
Future value lost: 3000 members x $500 = $1,500,000

Cost to launch in year 1: $500000
Cost per member to acquire: $5
Cost to acquire=3000 x $5 = $15000 (sunk cost)

Cost of lost = $1,515,000

Cost of lost = lost members and their potential future revenue lost + sunk cost of acquisition

(Also, losing a member is the loss of new members from referrals. If you can work out the referrals gained from your members, then this is another dimension to add to the calculation of lost...the revenue lost from new members introduced from lost members)

In summary, when you know the ‘cost of lost’, you can take action to reduce the ‘cost of lost’. Avoiding pain is arguably a more powerful motivator to take action, than enjoying a gain.

Measure the cost of lost. Make it visible. See the loss, feel the pain. Take action. Enjoy the gain.

Have a happy loyalty day!