Accounting for loyalty program points can present a challenge to organizations looking for ways to modernize their program by expanding beyond “spend and get” to reward for engagement. After all, the argument goes, points are a liability and creating more of them can’t be done lightly. This perspective will not only keep you from much needed transformation, but will also keep your program from reaching its true potential. To understand why, let’s take a look at the logic behind loyalty programs in the first place, how marketers get trapped in accounting-related exercises, and last, how we can collectively break free to modernize our programs for a truly customer-centric rewards experience.
Discount vs. Loyalty Program
Prior to loyalty programs, companies would offer a discount to encourage sales. Discounts are customer neutral, meaning that anyone can redeem them — whether they are a new or existing customer. Intuitively, some customers are worth more to the business than others. However, discounts do not differentiate and are just as easily redeemed by loyal customers as they are by deal seekers.
Now, if an organization applied the same discount via accrued points to loyalty program customers, not only would they ensure a repeat sale, but they would create goodwill and build value in the relationship. The dollars are guaranteed to come back to the business when points are redeemed and even then, not all points will be used.
The downside to this approach is that is has created a phenomenon of certain customers who like to bank their points for a future big purchase. The impact of this is two-fold if you are a business that tracks the value of your loyalty points in financial statements. First, points are a liability in the accounting sense which makes loyalty marketers concerned about creating too much liability for the organization. And, second, as most organizations’ loyalty programs revolve around a spend-and-get approach, there is a defined equation between revenue generated by loyalty program members and the liability they are able to create through their activity.
It is important to note here that while some organizations don’t track rewards on their financials at all, others have created their own guidelines for doing so as there remains no standard accounting method for tracking and reporting on program-created rewards.
The Flip Side
While loyalty marketers have become sensitive to the balance between revenue and reward, introducing new methodologies to this equation can be seen as challenging, or at worst, a threat. However, a fixation on the spend/liability equation ignores the flip side of the coin — the impact loyal customers have to business operations. To maximize the impact of a loyalty program, marketers should consider how they can maximize the value of customers to their business, further boosting the topline.
More to the point, customers are maturing and demanding more from brand relationships. Consider that according to research by Accenture, 51% of U.S. consumers are loyal to brands that interact with them through their preferred channels of communication. Increasingly, that channel of choice is mobile and social. Indeed, as reported by comScore, one of every five minutes of digital media time is spent with social media. Of this, roughly 80 percent is spent on mobile. Given all this, it’s clear that there is a large opportunity to use social media as a mechanism to turn the smartphone into a key component of your loyalty program.
Engagement Loyalty Drives ROI
Bringing it all together, engaging customers in these new channels–enabling them to earn rewards for their brand advocacy–allows loyalty marketers to modernize their programs and focus on the operational, topline value loyal customers bring to the business. By taking a social engagement approach to loyalty marketing, with an emphasis on providing utility and a fair value exchange, brands are able to drive social actions that not only engage customers but also create social proof, earned media, and word-of-mouth that simultaneously serves to grow new customer acquisition.
Moreover, research from brands that have added social media components to their loyalty programs have found that socially connected members buy twice as frequently as non-connected members. And one hotelier with such a program found that its connected members, in a given year, spent 75% more than the average member. They also had 2X more purchases than the average member in the same time period. Companies that track engagement loyalty find that the ROI is just as attributable as with “spend and get” programs.
Leave Liability Behind
Traditionally, brands have approached the loyalty equation with points, but research featured in the International Journal of Hospitality Management found that “providing social rewards [e.g., a member-exclusive personal lounge, health club, concierge services, and invitations to special events] increases customers’ emotional attachment and effective commitment to a company, and hence they are more likely to behave in ways that are beneficial to it.” This insight is important as brands look to create a value exchange that converts in social media.
Successful ideas for creating value in exchange for social participation and loyalty include invitations to social VIP only events, free upgrades or sneak peeks, unique or exclusive content, and the opportunity to engage with a brand celebrity — none of which result in liabilities you need to report to finance. For example, a leading sports retailer found that its members who were socially engaged spent on average $40 more per year. Multiply that by total connected members and it’s easy to see how the old accounting of points and liability must be modernized to reflect the new math of social engagement ROI.
At the end of the day, customers want to engage and interact with their favorite brands — and they want to be rewarded for it as they recognize the value of their time and their voice. Simultaneously, customers at organizations who have connected social media to their loyalty program are more engaged, participate and spend more with the brand, positively impacting the topline.