Loyalty Program ROI Calculator — Points Cost vs Extra Profit

How it works

Extra gross profit = members × spend × lift × gross margin · Reward cost = members × spend × (1 + lift) × points per 1 × cost per point × redemption rate · ROI = (extra gross profit − reward cost − running costs) ÷ (reward cost + running costs)

A loyalty program pays off only if members spend enough extra to cover the rewards and the cost of running it. Rewards are paid on all member spending — including what they would have spent anyway — so the effective reward rate (points × value × redemption) must stay well below the gross margin. Unredeemed points (breakage) lower the real cost. Research on customer retention shows that keeping and growing existing customers is usually cheaper than winning new ones, but the lift should be measured against a control group rather than assumed.

Worked example

2,000 members spending $600 a year is $1.2 million of sales. A 15% lift adds $180,000 of sales and, at a 40% margin, $72,000 of gross profit. Members now spend $1.38 million and earn 1 point per 1 spent at $0.01 per point with 60% redeemed, so rewards cost $8,280; with $15,000 of running costs the total is $23,280. Net gain is $48,720 and the ROI is 209.3%.

Sources: Harvard Business Review — The Value of Keeping the Right Customers

Frequently asked questions