Some of the hot topics in the loyalty industry right now are Managing Liability, Member Redemptions & Member Engagement.
How important is it for Loyalty Programs to strike the right balance between financial and non-financial objectives, and is there a greater purpose which can be served at this time?
On this weeks Loyalty Leaders Insights Webinar, the panel of industry veterans discussed these burning questions and a deep-drive into many financial aspects of loyalty, including:
- Loyalty program cashflow management
- Member engagement metrics to consider
- Redemption modelling and projections
- Lifetime member value considerations for CFOs
The expert panel for the event shared incredibly deep insights, and we had numerous follow-up questions from attendees after the event. Below are some of those.
Many loyalty programs implemented restrictions on redemptions in response to the cash-flow crunch. What risks do loyalty programs introduce when they restrict non-air redemptions?
Len: The risk of doing this is hurting a member’s long term retention, which in turn hurts the company’s long term bottom line (since fewer members are coming back to spend), which in turn hurts the value of the organization as a whole (since most companies are valued on their ability to generate profits in the future).
I think it’s clear that limiting restrictions on redemptions is not a great idea. However, the alternative is also not a great idea for programs that are truly experiencing a severe cash crunch. For these companies, each dollar that goes out reduces the cash reserve and puts them one dollar closer to bankrupt.
It seems many programs are stuck between two awful outcomes: limit redemptions and potentially hurt long term profitability, or don’t restrict redemptions but get dangerously close to bankrupt.
Talk about being stuck between a rock and a hard place!
I should say that I’m giving programs the benefit of the doubt that they are truly facing severe cash crunches. If not, and programs are just using this as an excuse to devalue the program, I think that’s an awful idea.
Jonathan: Just to add on Len’s thoughts. He has covered most of the important and salient points. The only other consideration for programs is that there is a cost to acquiring a member and if you lose that member’s loyalty, you have lost all future revenue from that customer. A negative customer experience will be shared up to 10X times more than a positive one. These members can easily switch from being program advocates to program detractors. Outside of a cash crunch, these restrictions will have a negative outcome that will far outweigh any cash savings.
Some folks have a hard time wrapping their head around the concept that outstanding points and miles represent deferred revenue rather than a true liability – but if programs make the effort to invest in the redemption proposition for members, what sort of return/benefit are they likely to see in the medium to long term?
Len: It’s unfortunate that we call it a loyalty program liability since the word liability comes with such a negative connotation. While liability is the correct term from an accounting perspective, I think it’s helpful to think of it as an investment in your members. And it’s quite a sizeable one! It’s not uncommon for this “investment” to be in the billions of dollars for a global loyalty program.
It’s been our experience that these investments generate a tremendous ROI. We’ve seen that members with an Ultimate Redemption Rate (i.e. the percent of outstanding points that are expected to ultimately be redeemed) close to 100% will generate 5 to 10 times more profit in the next 2-3 years than a member with a URR of 50%. That is, these members will certainly cost you more in redemptions, but the benefit that you’re getting in return (i.e. better retention, more long term profit) vastly outweighs the cost.
Jonathan: Programs are going to need these points to incent customers to reengage with them, They need to be viewed as an asset that can be used to cost-effectively retain and reengage customers. The issue for most hospitality loyalty programs is that they have not fully funded their liability. They should also be focusing on either non-cash redemptions or redemptions at a lower rate that will help reduce their outstanding liability.
How important is it for loyalty programs to maintain trust with members right now? Is there anything that they should avoid doing?
Len: Trust is absolutely critical to creating loyalty. In these very unusual and difficult times, I think honest communication is very important to maintain trust. If a program needs to make a difficult decision to fend off bankruptcy, a level of honesty in communications regarding this hard truth is important. I consider this a defensive play to protect trust.
Ideally, we can play some offence and take actions to build trust. This is where programs need to get creative. One way to build trust is to find ways to offer low-cost redemption options that are valued by your members – there are many vendors our there are coming up with interesting solutions to address this. Another way to build trust is to be generous with offers to let members earn points. There are a few good financial reasons for doing this:
- Point accruals won’t exacerbate the cash flow situation since there is no cash outflow when points are earned
- Keeps members engaged with your brand, helping you to stay top of mind when the recovery eventually happens
- Grows the number of points in members accounts, which increases your ability to use them as an incentive mechanism to drive demand during the recovery.
Being generous with points right now will result in lower margins in the near term, but the trade-off of lower margins for accelerated recovery is one that most CFO’s would gladly make in this environment.
Jonathan: Added colour, is that earned points can be funded from 3rd party vendors looking to gain access to membership bases. This is a current revenue stream that is available to these programs and should be aggressively pursued. Velocity will keep members engaged. Depending on how points are accrued for and accounted internally, there is an opportunity to enable transactional non-travel related redemptions at third party retailers such as Amazon or through networks such as PayPal. These redemptions can be implemented at a lower cost than traditional redemptions, thereby reducing liability, and at the same time keep members engaged and emotionally connected to the loyalty programs.
What is your advice to programs that haven’t suspended the expiry of member points/miles?
Len: I think all programs should suspend expiration since there’s really only upside to doing this. That is, it probably won’t cost you much in terms of decreased breakage since most of the members that were going to have their points expire are unengaged and will continue to have their points expire once the suspension of expiration ends.
On the upside, you’re leaving more points in members accounts so that when the recovery happens you’re in a better position to use those points as an incentive mechanism to drive demand (since there will be some members in this unengaged cohort that are at least somewhat responsive to points as an incentive mechanism). When you net it all out, I suspect pausing expirations will likely have a positive economic impact for your business.
Jonathan: Once you have taken into account the acquisition costs and the negative branding associated with point suspension, we are very confident that there is a negative ROI with expiring points. I would recommend programs extend their expiry to the end of 2021 at a minimum. This will give members comfort that their balances will remain intact regardless of what happens to their travel plans/options. This will also ensure that members are receptive to offers and promotions that the program runs once we are able to engage members to travel again.
Watch the full replay of Episode 3 – Loyalty Leader Insights “Managing Loyalty Redemptions, Engagement & Liability” below:
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