Retail Loyalty Readiness Worksheet
In another blog, we discussed how to establish and measure KPIs for loyalty incremental sales. The next step is calculating how much you can spend to set up and maintain the program in order to break even or achieve an agreed upon profitability goal. This worksheet can help guide you through costing out everything from the initial investment to the ongoing expenses.
Upfront Capital Investment
The upfront capital investment in loyalty can be significant, especially from an IT perspective, depending on the state of existing systems. The depreciation cost of this investment can be expensed against the program for a number of years.
- Is there an existing customer database that integrates all channels into a 360 degree customer view that could easily accommodate a loyalty feed? If not, creating this will likely be the costliest component of launching loyalty.
- Is there an existing CRM program in place? If so, spend will be lower since you can leverage existing campaign management and reporting tools.
- Are significant POS changes required to accept loyalty at checkout and close the loop back into reporting? If so, this will likely require IT capital and resources.
- Are major changes in the website’s online checkout necessary to accept and track loyalty? If the website is outsourced to a good vendor, this may not be a big deal, but if hosted internally it will require IT capital and resources.
- Will you need online account management? Will it be within an existing site or a new site? Online account management is a great feature for consumers, but it can be costly and complex to sync with existing customer data.
- Are you planning to outsource the development of the program or do you have the capacity to take it on in house? While outsourcing may initially look expensive, it actually can save money in the long run if you can leverage existing loyalty experience and infrastructure.
Upfront and Ongoing Expenses
Expenses will start hitting the loyalty program the day you start working on it. Some costs will occur one time upfront while others will be annual.
Considerations of upfront expense calculations:
- Do you need to hire industry experts to assist in program development? If there is limited loyalty experience in-house, this is highly recommended since it will actually save costs by creating efficiencies in the long run.
- Do you need to hire contractors for incremental IT work and project management? Budgeting for contractors can ensure you’ll have dedicated resources instead of making this someone’s part time job internally.
- How much research needs to be done either on loyalty programs in general or competitor programs? Do you have the resources for research or do you need to outsource? This needs to be included in your budget.
- Do you need customer research to test program concepts and benefits? This is highly recommended as it will help create incremental revenue assumptions.
- Are you going to test the loyalty program in a pilot program or go straight to full roll-out in all stores and online? It is always ideal to test and pilot to validate assumptions and get any technical bugs out but is not always feasible in the fast-paced world of retail.
- How will we market the launch? What materials are needed? Will there be a physical card (this can get expensive)? If so, how many do we need at launch? Again, testing will help with these decisions.
- What is the plan for training store associates and call center reps on the program? Is the training incremental or hooked into an existing training program? While it can be very expensive, dedicated training on loyalty with materials and role play activities helps ensure a successful launch.
- How are we planning to take loyalty data? Will there be a need for data entry from printed forms? Ideally, enrollment would happen at POS, but if that’s not possible (and it isn’t at a lot of retailers), paper forms may have to be used. A data entry system and ongoing resources will need to be included in the budget.
- How quickly can we ramp up any needed dedicated internal resources? Will there be a loyalty team or can it be absorbed into existing resources? Having dedicated resources will better ensure program success, but they don’t all need to start pre-launch.
Ongoing Annual Expense Considerations
All of the business and IT decisions that have been made to the point of launching the loyalty program will impact ongoing expenses.
- How much of the ongoing management of the program is outsourced versus managed in-house? Either option can be costly depending on the complexity of the program.
- Are loyalty marketing campaigns totally separate or is loyalty baked into existing marketing plans? Ideally, it should be done both ways as that creates dedicated marketing but also leverages existing campaigns.
- How are we marketing loyalty for acquisition and retention? Targeted? Mass? In-store? What’s your annual communication plan? This should be clearly laid out and accounted for up-front, but there should also be room for constant testing and learning.
- How many incremental new FTEs are required in marketing and IT to run the ongoing program? Some retailers treat loyalty like a one-time project and don’t properly nurture the program post-launch. Successful loyalty programs plan the necessary resources to take care of the program in the future.
- How often will we add new benefits and make changes to the program? How will those changes be communicated to the customer and associates? It’s important to have built-in costs to ensure keeping the program fresh over time.
- Who is managing the customer reporting for the loyalty program? Existing headcount or new? Marketing or finance? Build a plan into the program to potentially increase headcount over time – the more loyalty customer data that is shared, the more requests for information from the organization will come in.
- What enhancements are we planning to add to the program that might require IT work? When? Build future capital requests into depreciation expense.
- Will the program issue points? How a program accrues for point liability can vary widely from company to company depending on accounting methodologies. Public companies have much stricter rules and the liability can cause the program a lot of expense on the books that can’t be spent on hard marketing dollars. This is another reason why testing is important so that points breakage can be estimated upfront and liability can be limited.
And Finally, Measuring ROI
Once incremental sales and all upfront and ongoing costs have been assessed, an ROI model should be developed. This will depend on culture and existing financial practices, how many years the model should go out, and what the hurdle rate is to develop a project NPV and IRR. Ideally, it is easiest to sell loyalty if the program can at least get to break even NPV by end of year three. It’s critical that post approval, the ROI model is a living and breathing document with regular reporting on results against what was forecasted.