As a marketer, you know how important a loyalty program is for a business. It’s a key part of your customer retention strategy, helping increase customer lifetime value and repeat purchases. Building and launching a loyalty program may seem easy enough. You have vetted technologies and put a creative marketing plan together, but have you worked through the financial aspect of the program?
The costs of a loyalty program — outside of setup and management — could be overlooked within a marketing team, and the greatest expense to the loyalty program is the redemption liability. Your CFO will be concerned about how to track and plan the budgeting for loyalty liability.
Here’s how to plan accordingly.
What is loyalty liability?
Loyalty liability is a debt you owe to a customer that must be accounted for in order to set aside rewards that can be redeemed in the future. Companies are required to follow account rules and hold this on their balance sheet.
New regulations mean that separate accounting should be carried out for every contractual promise you make to a customer regarding their transaction (known as a performance obligation), and transactions with multiple performance obligations will need revenue for each to be logged separately.
Calculating loyalty liability
Revenue from customer loyalty points isn’t recognized until either the reward is redeemed, or when it expires. Loyalty liability is calculated by multiplying:
- Outstanding points: Points issued to customers that have not yet been redeemed or expired
- Cost per point: The expected cost of the points that will be redeemed
- Redemption rate: The probability that the points will be redeemed
What are the accounting standards?
When planning a customer loyalty program, your CMO and CFO must agree on a strategy, liability tracking, and how your accounts team will manage and track costs. To ensure your loyalty strategy is financially viable, partner with your accounting team to discuss how they will track and account for the prospective program.
Too much liability on the books can have a negative impact on a company’s financial health. Knowing the guardrails for the program is a balance between accounting and marketing. Accounting also must be staffed to support and manage the program’s ongoing reporting, liability, and overall health.
How to decrease liability in loyalty programs
If you’re concerned about the level of liability your business is projected to take on, there are several ways to minimize your risk.
1. Push program engagement
Ensure your team is staffed to properly manage the program through analysis, marketing, and monitoring. As important as it is to push customers to join your program, it is also equally important to use marketing channels like email and SMS to push the redemption of offers. Showing content in emails that includes details like points levels and reward opportunities will help drive urgency and lift conversion.
2. Set reasonable goal spend targets
Consider order frequency as a part of your strategy, and make sure offers are reasonable so customers can make their purchases in a timely manner. Expirations on offers and/or points are a crucial way to reduce loyalty liability. Retailers also use auto-redemption to reduce liability. Once a points’ threshold is hit, a reward is triggered with an expiration date.
3. Consider non-discount-based rewards
Start with a low liability program by considering non-monetary rewards like early access to product launches, entry to events, meet and greets, or something that may seem simple like sitting at the chef’s table. There are also opportunities to use free products as rewards that allow for accounting to track the cost of goods sold, instead of using a complex points-based liability.
Free products are a great way for marketing teams to promote strong brand positioning through customer communications. It can often be easier to get stakeholder buy-in when the initial program has less risk and is easier to track.
Alternatively, some brands provide the option to donate points to get the points “off the books.” Having strong creative, marketing, and messaging tactics around managing the program is crucial to the program making financial sense.
4. Prioritize ongoing program optimizations
Continue to analyze and optimize your loyalty program. Just like anything else in the marketing space, it’s important to thoroughly analyze the program, understand growth, redemption rates, point accruals, etc. Having a forecast and baseline projections for the first year is crucial so you can set expectations with marketing and accounting.
5. Set benchmarks and predictions
Forecasting redemption rate and monitoring is a key driver to keeping track of your program. Reviewing the lift on the business against the program costs should be measured and tracked monthly to ensure the program continues to be effective.
Loyalty programs can grow and evolve as the brand matures, and as accounting teams become more comfortable with tracking processes. With the right marketing and customer messaging, customers can be excited about the changes to the program.
Glossary of terms you should know
While this list is by no means extensive, here are some terms you might encounter when considering loyalty liability for your business.
Fair value
Fair value is the price at which an asset could be exchanged or a liability settled in a current transaction between willing parties, other than in a forced or liquidation sale. Fair value is determined based on assumptions that market participants would use in pricing an asset or liability.
Deferred revenue
This is money that a company receives before they provide a product or service to their customers. This money is not yet earned, which means that it will be earned as the company provides more products or services to their customers.
Revenue recognition
Revenue recognition is defined as the accounting process for recording revenue, which is the net amount of the sale price that is received in exchange for goods or services.
Transaction price
This one is pretty self-explanatory, but worth calling out: Transaction price is money paid for a good, service, or property. This differs from price value, which refers to the utility of a good as perceived by its holder.
Contract liability
Contract liability is the obligation to perform a contract as written. It is also called “contractual” or “express” liability. A party that fails to perform its part of a contract can be sued by the other party for breach of contract.
Loyalty liability made simple
Accounting and reporting are key to ensuring your loyalty program is optimized and being tracked appropriately. This can be challenging as you are forecasting events that may be unknown, but some simple tactics can help decrease loyalty liability.
Interested in building a loyalty program with a loyalty partner that can help you with liability and more? Check out LiveArea, a Merkle Company’s insight into loyalty programs, and request a demo with Yotpo.
