Insight: A better way to estimate progamme liability

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By: RickFerguson |

Posted on June 2, 2016

No aspect of loyalty programme management is more a combination of art and science than estimating programme liability. Within the crucible of today's multi-million member loyalty programmes, the difficulty of correctly forecasting breakage and manage liability can result in swings of millions of dollars on your balance sheets. A 2014 article from Towers Watson consultants Len Llaguno and Manolis Bardis offers a responsive, dynamic approach to liability management that can help operators understand and accurately predict the true costs of their programmes.

The entire article is worth reading, so we won't re-hash it here. For the time-challenged, here are a couple of money quotes to ponder. In the first, the authors pinpoint one of the challenges of relying on traditional actuarial techniques to manage liability:

"Unless trained experts very carefully - and frequently - calibrate these [actuarial] techniques, the resulting computations may be biased in dynamic environments common to loyalty programmes. Without proper skill, these methods may not fully anticipate and predict changes in redemption patterns, resulting in model estimates lagging behind true costs. This is particularly troublesome in an environment where costs are trending upward, because estimates will constantly come in low."

To account for the limits inherent in actuarial-based liability models, the authors suggest adopting predictive analytical based models to better calculate liability at the level of the individual member:

"The solution is to use more advanced predictive modeling techniques to understand loyalty programme costs. Such models are capable of assessing changes in forward-looking predictors, such as point-earning behavior, to predict changes in redemption behavior. This allows the cost estimate to be much more responsive and accurate, quickly reflecting the impacts of all available information on the programme liability. These models have an additional benefit of identifying predictors that are drivers of costs. This gives finance executives an intuitive way to interpret changes in the loyalty programme liability."

Liability management is a topic of critical importance to loyalty programme success and yet so often opaque to marketers, which makes articles such as this one invaluable. We encourage you to read the entire piece here.



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