In today's challenging economic environment, loyalty programs have become a crucial tool for businesses to engage customers, drive revenue and enhance customer lifetime value (CLV). However, loyalty program owners often face a significant challenge in managing program costs, particularly the cost of rewards which is typically their largest expense and heavily scrutinized.
In this episode of the Loylogic Podcast, we discuss how loyalty program owners can use rewards as an opportunity, not a risk. Chapters and key topics include:
1. Managing risk and profitability (01:41 to 04:43)
- The guiding principles that should we be using to establish a budget for rewards and how to strike a balance between incentivizing customers and maintaining a solid bottom line.
- As loyalty programs evolve and costs fluctuate, we look at how program owners can stay one step ahead and effectively anticipate these changes and safeguard against unexpected financial challenges.
2. Rewards, redemption and resource management (04:43 to 11:54)
- Redemption rates of loyalty points or miles can have a significant impact on a program's finances. How can program owners forecast these rates accurately and control them strategically? Can you share some insights on maintaining the equilibrium between customer satisfaction and business viability?"
- The liability associated with loyalty points and miles and how program owners can effectively manage this while ensuring that the program remains appealing to the customers.
- How various types of rewards might offer different levels of cost-effectiveness and strategies for allocating resources optimally across diverse reward types.
3. Metrics and program management (11:54 to 14:12)
- The key metrics or KPIs that program owners should focus on to effectively evaluate the financial performance of their loyalty program
- How these metrics should be interpreted to make informed decisions about the program's future direction.
Listen now...or read below
The podcast can be enjoyed here, or by heading to the Loylogic Podcast channels on Spotify, Apple Podcasts and wherever else you listen to your favourite shows. A transcription of this latest epiosde can also be found below.
(1:41): When thinking about the financial blueprints of a loyalty program, what guiding principles should we be using to establish a budget for awards? And how do you strike a balance between incentivizing customers and maintaining a solid bottom line?
That is a really cutting question that I think touches right at the core of loyalty program management. When setting a budget for awards, you need to try shifting your perspective and view it more as an investment rather than merely an expense.
Looking at the top loyalty programs, they're allocating a substantial part of their revenue, sometimes up to 15%, for rewards. And it might seem a bit high. But if you can share the value of those investments to your business, it can be actually quite a logical decision.
If we look at some of the more lagging programs, often they're struggling to allocate their budgets. And that often means they're not really seeing the right results and sometimes deliver a really poor rewards experience. So although that approach may save some money in the short term, it really does risk losing customers and losing that engagement. So, ultimately, the aim is to strike a perfect balance between incentivizing your customers and making a robust bottom line.
(2:43): In order to achieve that perfect balance, there's always going to be an issue where costs fluctuate, especially as programs evolve. So how can program owners stay one step ahead and effectively anticipate these changes? We'd all love to have a crystal ball, ultimately, at the end of the day, but what strategies have you seen that help to safeguard against unexpected financial challenges?
You've touched on an essential aspect of how you manage a program and that's around the adaptability. So often, as programs evolve and grow, costs inevitably fluctuate. But the key really is managing these changes. And that really lies in understanding how that program is performing, understanding the financial forecasts, and any of those scenarios that you need to plan for. So often, it's the crucial part of the financial planning.
Looking at leading programs, again, I think you can see that they're the ones conducting rigorous financial forecasting and scenario analysis, they're really able to anticipate those costs. And it's really some of the average and lagging programs that fail to have a more structured approach to that, which really means that they're unable to project their costs out into year two, year three and beyond.
That lack of financial stability really limits their adaptability for the program and means that they're not really looking at it as an investment, but very much as a cost. They're not able to say, well, if I put this amount of funding behind it, we can expect this sort of return.
(4:08): How far ahead can programs predict? How far ahead should they be looking?
I think there are a few different horizons that you may want to look at, depending on exactly the maturity of your program. I think a good a good idea would be looking at the profitability maybe of your customers over a two year timeframe. But possibly, you know, you may want to take a wider lens, if you know that there are more technical costs that need to be incorporated. So possibly a five year view may be better.
(4:41): The redemption rates of loyalty points or miles can clearly have a significant impact on a program's finances. So as a program owner, how would you recommend they forecast these rates accurately and control them strategically?
Redemption rates can be a bit of a challenging aspect within the program. Often, program managers and program directors really want to see their customers redeeming, but maybe other parts of the business see that purely as a cost. So there are certainly financial implications there. But without redemption costs, you're not really going to be seeing that customer satisfaction, you're not really going to see them engaging in the program.
Ultimately, I think that if you can prove the link between redemptions and the future value of those customers, and how that levels up to your overall program, then businesses are really viewing those redemptions as a good sign of a healthy program. And not just a cost.
(5:37): You mentioned leading programs there. What are the leading programs doing to maintain the equilibrium between satisfaction and business viability?
I think it starts with the data, I think you have an accurate understanding of how your customers are behaving, and understanding of how you can forecast those redemption trends, and certain predictive tools that are really able to guide your strategy. But, of course, you need to make sure you're engaging those members, and using your personalization capabilities, using your media in ways that really engage your customers.
Of course, you can't do that in isolation. I think you need to keep a really close eye on your program, and understand any of those changes. So, if your customers are maybe finding certain redemption options more attractive, or maybe they're, you know, moving into new markets, different redemption ranges become important.
(6:36): I apologize in advance for this. But I've got to bring up the elephant in the room, which is the liability associated with loyalty points in miles. Now, how can a program owner effectively manage this while ensuring the program remains appealing to customers, which ultimately is kind of what they live and die on?
Yeah, it's really good you brought this up. I think, frankly, it's one of the aspects that businesses overlook, and they don't really understand it until it becomes a problem. The opportunity for programs is to be more proactive. Probably behavior is more reactive at the moment, I think. The leading programs really understand that it's something that needs to be managed actively. And it's not something that is going to work out well for the for the business if it's not really proactively managed.
Some of these leading programs are using actuarial models, and employing robust forecasting techniques, that really gives them the ability to understand their liability today, and also what they expect it to be in the future. Often those liabilities can be understated, sometimes they can be overstated. And both of those can represent real challenges for businesses.
(7:45): Is this where smart cost per point management comes into play?
I think that's a really important weapon in the arsenal of programs. Understanding that by taking an active view on what the average cost per point is, they can look to lower it over time, which ultimately drops more profit to the bottom line.
(8:04): What advice would you give to a program director when it comes to optimizing costs without negatively affecting the customer proposition? What are the trade-offs to consider? How do they strike the right balance?
It's absolutely striking the right balance, it's making sure that you're delivering value for customers. And that balance with a cost really makes it more of an art for program managers. They need to understand that it's something that you can't really compromise for customers. It's really important to get that balance, right, in terms of the cost invested. And I think, if you're looking at some of the weaker programs out there, they're more likely to overlook the importance of cost optimization. They've probably had a budget that's been in place for years on end. And a manager just signs that off, and does that every year.
What we tend to see is those programs missing the opportunity, because they're not really looking at what would their program would be like if they increased their budget. And not really understanding what the profit opportunity would be for making some of the cost savings as well.
(9:19): To make those necessary changes, do you need a mindset shift?
Yeah, it's about providing the best value for your customers, but also about recognizing that reward budget is an opportunity for investment. It's an opportunity to drive deeper loyalty for your customers and an opportunity to drive greater profit for your program, but also maybe optimize certain elements in the program that you haven't looked at for, you know, maybe up to the last five years.
(9:52): Within the constraints of a budget, various types of rewards might offer different levels of cost effectiveness. How should program managers assess and compare these?
Reward cost effectiveness is an essential factor. I think it's about providing value for your customers. Without overstepping that budget, I think customers really want more and more over time and I think programs have felt the pressure of needing to cut back. And really the only strategy that has been working for those programs is A/B testing for the rewards, getting that customer feedback, and seeing where there's an opportunity to leverage data to optimize rewards, which ultimately leads to the larger bang for buck.
(10:39): We talk a lot about golden reward moments and diverse reward types. So how does that come into play here? How are the leading programs that you talk about devising strategies to maximize the potential of both global and local reward types?
It starts with understanding what rewards your customers are going to be most interested in. Programs are able to access better data now than they were before. Understanding what those members want is not quite the challenge it used to be. The challenge now is how do they get it to those members at a price that the program's happy with, and the price that maybe the wider businesses is happy with, as well.
I think you need to look rewards sourcing operations, you also need to look at the types of product ranges that maybe have margins that are more attractive for your business, and bringing that all together, to really ensure that on one side, you're driving that customer satisfaction. But on the other side, you're also ensuring the long term sustainability of your program.
(11:49): In your opinion, given everything that you've said, what are the key metrics or KPIs that program owners should focus on to effectively evaluate the financial performance of their program?
It's a really good question. I'm not sure there's ever one magic metric out there. I think certainly, depending on the industry you're in, and maybe depending on the education and loyalty that you've had, you may gravitate towards one more than the other. But I think you can probably handpick a few that are the ones that are going to drive you in the right direction. And one that's very common is understanding the revenue per member. It's vital to understand the customer lifetime value (CLV) of a member, understanding how profitable those customers are going to be across a period of time. And, of course, understanding that your program is an asset. Understanding the level of profitability of that program, the total level is really something that you can use to strategically guide the business.
(12:54): To wrap up this episode, could you summarize our discussion or provide listeners with a few key takeaways?
At the heart of a successful program is considering the reward budget as a deliberate investment designed to nurture customer relationships, but at the same time aligning that with business strategy, making sure that you're staying nimble and adjusting to any trends. So if there are any changes in the environment, you're able to safeguard your loyalty program, and ensure you're meeting those new and emerging trends.
As well as that, optimizing your award budget, not necessarily thinking that the amount that you had last year is going to be suitable for this year, is key. Really being proactive and understanding that for each dollar that's invested, what the return is, so you're really maximizing that opportunity. Above all that, it means looking at your global loyalty program as a strategic asset, and not merely as a as a cost center.