This subject has been done at least three times before on this forum.
1) The branch has more traffic to the Lytham / St Annes area than Blackpool.
2) with the direct tram link to Blackpool North, it will be somewhat easier to get to the south shore via Blackpool North than it was
3) a direct link from Lytham / St Annes to Preston is essential.
4) a direct link from Lytham / St Annes to Blackpool is desirable, preferably central Blackpool
Therefore the answer, IMHO, is to connect the tram on to the South Fylde line just south of Pleasure Beach, and run it to Lytham. Truncate the existing South Fylde Line at St Annes. Dual track (one tram, one rail) between Lytham and St Annes.
Lytham St Annes retains direct services to Preston, with potential to double the frequency.
Lytham St Annes gains direct trams to Blackpool South, Central, North, Bispham, Cleveleys and Fleetwood, with potential for perhaps 4 trams per hour
Cost would be electrification of 9km trolley wire, maybe some power supply, 5km of tram standard track on the old formation, 400 m of new track on street at a junction near Pleasure beach, and station changes at Lytham, Andsell and St Annes. And some trams. Possibly a new tram station to serve NW St Annes. Maybe a passing loop in the same area. Somewhere in the region £50m - £100m.
It would be cheaper to operate than the current service, and lift revenue considerably.