THE CLARUS Blog

Removing the Risk: How to Create a Profitable Premium Loyalty Program Financial Model

Everyone knows that a successful loyalty program can lead to incremental revenue over time, but at what cost?

Most traditional free loyalty programs require a huge upfront investment to hopefully break even in a year or two.

And that’s not counting the annual vendor costs for running your program and/or platform.

At Clarus, we think about loyalty program pricing differently. We don’t charge any upfront fees for buildout, strategy, deployment, and management.

And we don’t charge any upfront fees for managing your program or add-ons and changes.

What makes that possible is a unique premium loyalty program financial model that we’ve developed over time.

So, after we hold a loyalty program strategy and alignment session with a retail partner and map out their loyalty program design and validation, our goal is to create a profitable premium loyalty program financial model for them.

Clarus works upfront with all our retail partners to create a loyalty program that will benefit them financially.

So, how do we do it?

 

1. Collecting the Right Information

The first step in designing your loyalty program financial model is collecting some necessary information.

  • What are the number of annual transactions?
  • Average order value (AOV)?
  • Purchase frequency?
  • Average shipping costs?
  • The number of stores (for brick and mortar retailers)?

This information helps our finance team, product team, and loyalty strategists craft a tailored solution that fits each individual retailer.

A typical program construct includes:

  • A fee when a consumer joins the program (which we work together to determine)
  • Instant discounts or cashback
  • Free shipping & return shipping
  • Access to a discounted marketplace of more than 1,000 stores
  • Exclusive experiential benefits for your program members

Since every premium loyalty program is customized for each brand, the member benefits may differ.

And while the members’ benefits are discussed in our loyalty program design and validation conversation, this is where we start to understand the costs associated which can impact the fee that members pay to join.

Once the benefits structure is finalized, the financial model begins to take shape.

Then, we can start to do some forecasting.

Learn more about figuring out your loyalty program benefits mix.

 

2. Making Your Financial Predictions

Once a working model is on the table, the important question comes.

How will this new premium loyalty program impact your revenue stream?

Well, now we’re ready to make some educated predictions from the data we have collected.

Based on the discussions above, we obtain an annual number of impressions we assume will see the program offer.

Simply put, how many of your customers do we think will see the offer to sign up for your program?

From these impressions, we assume a conversion rate (based on historical data) of consumers that will join your program.

Once we predict how many people will join your program, how do we figure out how much incremental revenue it will drive to you?

At Clarus, we use a persistency curve gleaned from years of historical data to make accurate predictions. Some other important predictions we make are:

  • Out of all the people that join your program, how many on average will cancel each month?
  • How many will continue to use the benefits of the premium loyalty program?

By using this persistency curve and following a customer joins lifecycle, we can predict:

  • How long the average member will stay in the program.
  • The average amount of benefits they will receive.
  • The revenue they will generate.

Since members are paying to join, the model can then predict the revenue the program will generate using the agreed upon membership fee price point.

We make our revenue from a percentage of your customers’ membership fees, so we then create a margin that works in favor of everyone.

If the margin doesn’t make sense financially, we simply go back to the drawing board and can make tweaks to the model until it does.

Remember, the goal of your premium loyalty program is for everyone to win: You, your customers, and Clarus. It’s a true partnership.

 

3. Putting Your Model to the Test

At Clarus, we use two types of financial models to predict incremental revenue for your brand.

The first is a Lifetime Value model.

This shows the value of all loyalty program joins over 1-, 3-, and 5-year periods if every join came in on Day 1.

This model is helpful to show how long each join takes to break even or begin to be profitable. It also helps show the value of our partnership in totality.

The second model, and the most important to retail partners like you, is the Cashflow model.

The Cashflow model shows how much revenue is generated to you if joins from your customers come in as expected each month.

This gives you a clear picture of how much revenue you should see after 1, 3, and 5 years, respectively.

Ultimately, these financial models are used to provide our retail partners with the best revenue estimates they can expect from partnering with Clarus.

Have a requirement that’s a little more out-of-the-box?

While these standard models exist, we are very comfortable working with individual partners to customize solutions that work best for your brand and your customers.

At the end of the day, we want to make sure that your new premium loyalty program is a win for everyone.

 

A Premium Loyalty Program Financial Model That Works for Everyone

Before your company launches a premium loyalty program, you want to mitigate risk as much as possible and make sure the financials make sense for everyone involved, including your customers.

After all, your customers deserve the best from a premium loyalty program, but the numbers have to work.

And our financial model methodology makes it possible.

We believe strongly in our no-risk financial model at Clarus and take every step of your loyalty journey with you to ensure a profitable premium loyalty program.

After your model is completed, it’s time to move on to your loyalty program marketing communications plan.

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