The Overspend Effect and What It Means to Your Bottom Line

Photo of a restaurant owner giving a customer extra food to exemplify the overspend effect from Thanx

Loyalty programs have changed over the years. Customers have cleared their wallet of punch cards and plastic cards and are now opting for smarter, mobile-friendly programs.

With advanced technology that captures data and provides actionable insights, merchants can see how much each customer spends, how frequently they shop, how much they’re willing to spend, and even compare it to competitors.

Modern customer engagement and loyalty programs have come a long way and nowadays instead of using them to offer discounts to everyone, merchants can hyper-target and personalize rewards to their best customers adding immediate revenue and ROI to the bottom line. And there are some interesting effects of using this approach, one of the most powerful being the overspend effect.

In this post, we’ll explain what the overspend effect is, what it means to your bottom line and explore additional customer behaviors that add value to your business.

What is the overspend effect?

When customers have a reward to redeem, they’re more likely to spend more during that visit. Quite simply, that’s the overspend effect.

Overspend effect from Thanx customer engagement and loyalty

To see the overspend effect in action, Thanx tracks how much a customer typically spends when they don’t have a reward to redeem and compares that to the amount spent when a customer does have a reward to redeem.

Sales generally spike when customers know they’re getting a good deal.

What does the overspend effect mean for your bottom line?

When customers spend more at your locations, your business earns more money, but it goes beyond that. Here’s a look at how overspending during reward redemption affects your bottom line:

Increased check size

Rewards incentivize customers to buy more, which means you make more money. Let’s say Jane usually spends $10 or less at a local bakery, but when she’s redeeming a $5 off coupon, she splurges and buys a dozen doughnuts for her coworkers in addition to her regular coffee and bagel.

Most merchants worry Jane will spend $4.89 and not go over the coupon limit. In reality, she spends more than she normally would without the coupon.

Her bill comes to $22, rather than her average $9.75 – even after the coupon.

The company just realized $12.25 in incremental revenue from a customer that doesn’t typically spend that kind of money during a visit.

Now imagine hundreds of customers that do the same thing. Suddenly, the overspend effect has provided a generous boost to your bottom line.

Increased revenue from customer engagement and loyalty from Thanx

Improved customer retention

When a customer earns a reward, they feel valued. When customers feel valued they return again and again. Making customers feel appreciated in a competitive world where businesses are screaming for a customers’ attention, is a simple way to show appreciation and retain customers.

Ability to upsell

Customers who redeem rewards are loyal, and they’re also the most willing to try new products. Research shows 65% of merchants are able to upsell or cross-sell to existing customers, compared to just 12% of new customers.

When a customer redeems a special promotion, you could reward the redemption with a free sample of a new menu item or a trial run of a new product or service.

Confirmation that your rewards structure is working

If customers are overspending when they redeem a reward, it supports your rewards structure. A customer spent their hard earned money to get that reward, so it must be of value to them.

If a rewards structure is working you’re in good shape. If you think you can improve it, but aren’t sure how to gather feedback from your best customers. A customer engagement platform can help you collect feedback from customers about the kind of rewards they want to see.

What other customer behaviors impact revenue?

As mentioned, Thanx provides lots of amazing customer data, so which ones should you focus on that actually impact your revenue? Here’s a sneak peek at other meaningful customer behaviors:

  • Customers who belong to a loyalty program are more likely to ramp up spending when they’re about to get a reward. The reward serves as an incentive to buy a coffee for a friend, add an appetizer to their order or splurge on the more expensive car wash.

Customers might even visit more frequently to get the reward faster. For example, Tom decides to grab lunch at his favorite restaurant (even though he packed his lunch) because he knows he’s about to get a cool reward.

  •      Sustained lift

Customer’s buying habits can change over time, and sometimes they change as a result of personalized rewards. When a customer increases their level of engagement after joining your program, it’s called a Sustained Lift.

Sustained Lift from reward redemption spending

In time, you may see customers earn rewards faster, which means your business experiences a sustained lift in revenue.

It’s a great metric that helps merchants see how effective their loyalty program is. Sustained lift directly correlates to a program’s ROI.

During a time when merchants are trying to justify every dollar spent, this kind of data is crucial to have. Punch cards can’t do that.

Wrap up

Loyalty programs have come along way in the last few years. They’re now providing more data than ever before, and smart merchants are utilizing these new programs to leverage the power of customer data.

The overspend effect is just one of the many metrics you can measure.

When you’re ready to utilize customer data, reward your best customers, and grow your bottom line, request a demo of Thanx, a modern, mobile-friendly data-based customer engagement platform that has everything you need to succeed.