For marketers, loyalty programs present a wealth of opportunity; you can turn your customers into lifelong evangelists and gather crucial info about their shopping habits and preferences along the way. Although these benefits are incredibly helpful within the marketing department, their financial implications can be harder to pin down.
Eventually, you'll need to answer important financial questions: Is your program profitable? How many outstanding points will be redeemed? Is your program's growth sustainable?
These questions address the financial risk associated with your loyalty program — also known as loyalty program liability.
Read on to learn how you can manage this liability, and even turn it into an asset.
It starts with strong models
Your predictive models are the foundation of your loyalty program's financial health. During our last video series, we covered how to use models to predict your Ultimate Redemption Rate (URR), which is the basis of your financial forecasting.
Once you understand your URR, you can begin forecasting the Expected Future Profit (EFP) of each of your loyalty program members. EFP is a comprehensive number that takes into account all of the associated revenue and expense of each redemption, providing the best view of the future profitability of your members. Our new video series explains how you can use EFP to assess the economic value that the program generates.
Liability can be an asset
As your URR increases, it can be tempting to assume that the program is becoming less financially viable due to the increased program liability. This couldn't be further from the truth; if your models are accurate, a higher URR signals that your members are becoming more engaged.
Over time, more engaged program members lead to higher lifetime profitability. In fact, we've found that members with a high URR can be anywhere from 5 to 10 times more profitable than members with a low URR.
With this in mind, you can see how every dollar you spend on program liability can also be viewed as an investment in your members. When viewed from this angle, the liability starts to look more like an asset that will deliver a positive return in the long run. Strategically managing this asset to maximize ROI is crucial to scaling the economic value of your program.
Ready to dive into loyalty program liability?
This is the just beginning of what loyalty program liability can do for marketers. To get the full scope of how you can leverage liability to take your program to the next level, head over to Kyros Academy and watch our new video series, "5 Things Marketers Should Know About Loyalty Program Liabilities".
