Is Your Loyalty Program Profitable?

As we leave 2025 behind, It’s the beginning of another year, and a time where many CFO’s are focused on the “joys” of year-end financial reporting. As marketers, we may be spared from much of the accounting and reporting; however, if you run a loyalty program, you may wonder (or your CFO may be asking) how is my loyalty program performing financially? Is it a vast, deep money pit, draining the company of valuable resources (highly unlikely) or is it the star product, driving the bulk of revenue and profits (also most unlikely). The truth is likely somewhere in between, but how would you get a grip on your program’s financial performance?

The answer is to conduct a Cost-Benefit Analysis of your program. It’s essentially a 2-step process. The first (and hardest) step is to estimate the incremental revenue and margin your members are contributing as a result of the program, and then in the final step, deduct the costs of running your program.

How do you estimate incremental revenue and margin?

At Capillary Technologies, we recommend a 2-way estimate of incrementality. Cohort Analysis and Multivariate Regression Analysis allows for a range of incremental revenue to be estimated based on robust analytical and statistical modeling. We won’t get into the details, but with Cohort Analysis, you identify similarly performing customers over a period of time (typically 12 months to consider seasonality) prior to joining the program, and compare those customers over a subsequent period of time (members vs. non-members) to determine the lift in spend, transactions, and retention. Similarly, with Multivariate Regression, you are analyzing the performance of members vs. non-members and estimating the role of program membership in explaining the incrementality/difference in performance of members vs. non-members. The estimates of incremental lift in spend and retention can be extrapolated to the overall program’s active member base to provide a range of incremental revenue (and margin) driven by the program.

From this, you’d subtract the expenses over that time period (i.e.,last 12 months). This would include the cost of rewards redeemed, member benefits (i.e. welcome gifts, birthday or anniversary gifts and other “hard cost” benefits), loyalty platform licensing and support fees (internal and external), and any other expenses that are incurred in the marketing and support of the program. You may also consider offsetting these costs with any points/loyalty currency breakage during the year; however, your finance team may have a differing view on that.

The net of these two steps is your estimated financial contribution (or cost) of the program. If your eyes glaze over at the thought of this, Capillary Technologies has a team of consultants and analysts that have deep expertise in performing Cost Benefit Analyses for hundreds of programs. And if your program isn’t performing as well as you’d like, we can help get it in shape for the new year and beyond.