[Editor’s Note: Wise Marketer brings you the face-to-face with the brightest minds in the customer engagement and loyalty business. We connect you with people leading change in digital marketing and cover every aspect of what some people refer to as “the customer”, a generic term that refers to all that must be considered and put into action to evolve as a customer-centric enterprise.
Len Llaguno is the most authoritative voice in liability management, program performance, and program financial optimization that we’ve encountered. Yes, there are others who specialize in these topics, but Len has taken action to establish leadership in this area of the business.
Len has created a series of short videos that share knowledge of the foundational elements of loyalty liability management. In this article, he leads off with an overview and definition of key terms and we link to his video library. We are happy to announce that our Loyalty Academy is working with Len and his company, Kyros Insights, to create an advanced course on this topic. This is one of Loyalty Academy’s most anticipated courses and we look forward to announcing its completion very soon.]
Loyalty programs can help you retain and delight your customers, but they can also be a huge headache for your financial statements. Even though loyalty points seem “free” to your customers, your business still needs to record these transactions in your balance sheet just like any other purchase.
The tricky part is figuring out how much each transaction is worth, and when you should report it. These are the basic mechanics of loyalty program liability — and everyone with a loyalty program (or considering one) should be familiar with these principles.
Here are some the basics of loyalty program liability to get you started:
Ultimate Redemption Rate (URR)
The first step to assessing loyalty program liability is calculating your program’s ultimate redemption rate (URR). This rate helps you estimate how many points will ultimately be redeemed under a number of conditions. This includes the URR on earned points, URR on outstanding points, and current month URR.
- URR on earned points – Percentage of earned points to date that have already, or will be, redeemed
- URR on outstanding points – Percentage of points outstanding that will eventually be redeemed
- Current month URR- Percentage of earned points in a given month that have already, or will be, redeemed
With these numbers in mind, you can begin calculating the overall cost of your loyalty program.
Cost per point (CPP) and fair value per point (FVPP)
Now that you know how many points will be redeemed, it’s time to start calculating the costs of these redemptions. To do this, you will need to calculate the cost per point and fair value per point.
- Cost per point – expected cost of each point that will be redeemed in the future
- Fair value per point– expected fair value to the customer of each point that will be redeemed in the future
To calculate these quantities, you’ll need to predict what people are going to redeem their points on, and the associated cost of these redemptions.
Combined with the URR, these figures make up the basic figures you will need to calculate your loyalty program liability.
Interested in learning more? The new Introduction to Loyalty Program Accounting video series from KYROS Academy features definitions, equations, and examples to help you make the most of your loyalty program accounting.
Armed with this information, you will be able balance the long-term benefits of customer loyalty with the potential risks of loyalty program liability.
Ready to dive in? Check out our first video to get started.