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How to manage liability in your loyalty programme

The single greatest expense in a loyalty programme is managing the redemption liability - the eventual cost to your company of the redemption of all outstanding loyalty points. Due to the impact of Covid-19, many loyalty programme managers are facing increased pressure from stakeholders and their financial teams to manage the liability their programmes have created.

But this issue is not unique to the current climate. New programmes can sometimes have lower redemption rates and there are usually multiple factors that can cause this. Maybe the low redemption rates are due to members taking too long to earn enough points for a reward, or they’re are not really interested in the rewards that are on offer. In some cases, members might not be able to access a particular reward because they're not able to get it at that particular point in time.

On the other hand, we also see liability challenges with established programmes. As the programme matures and becomes more successful, you expect that members will be earning more points, therefore you'll issue more points. The same will happen for outstanding, unused points – the number will continue to grow. A successful loyalty programme, if not monitored properly, can see liability go through the roof. (Tweet this)

Loyalty programmes are designed to reward consumers and, in turn, the brand itself. So, what happens when points are not redeemed? How do you go about fixing the problem? While it’s not always something you can do quickly or easily, there are some actionable steps you can take in the shorter and longer term.

Short Term – Micro redemptions

There are some short, technical adjustments that you can make to your programme. For example, you could create auctions or sweepstakes. You could even introduce low cost rewards to try and encourage people to redeem a lot more often and reduce your overall liability.

Consider moving to micro-redemptions. We know that customers that engage quickly and see the value in the loyalty programme are much more likely to continue to spend - and spend at a greater velocity than others. Some of our initial research has shown that customers who redeem at least once are typically 28% more valuable in terms of incremental spend on the long-term.

Getting someone to realise the value in the short-term is key. Micro-redemptions allow customers to realise the value in the short-term and drives future profitability with those same customers.

While these tactics are helpful in the short-term, it’s imperative that you closely monitor the cost of issuing those rewards, and also the cost of fulfilling them.

Long term – Emotional Engagement

When we talk about longer term solutions to the issue of liability, we’re really talking about changing the structure of your programme. For example, changing the rewards catalogue by removing some unused, unwanted rewards. You might want to source more attractive rewards at cheaper rates. You might also want to look at perhaps changing some of the expiration rules around the points system. Or even deferring when you issue your rewards, because you want to make sure that you've achieved a certain level of healthy profit across the programme first.

But what will truly transform your programme is to move from transactional to emotional engagement. If you can engage with customers when they're not transacting with you, whether that's through gamification, emails, surveys or in-store visits, you’re bringing them in and involving them in the programme, which can be incrementally valuable to you without driving up your liability.

Epsilon has had a lot of success with gamification tactics in particular. Some of our brands who have less frequent transactions have employed games being sent out via email, available on the website or through the app. All of these tactics will give you some eyeball time in terms of customers engaging with your brand while not actually transacting and not driving liability for you; but you're getting that emotional engagement and that can be tremendously valuable.

Another initiative we’re seeing more often is companies giving their members the ability to convert their unused loyalty points in to a cash donation to charity. This kind of strategy benefits many people. For the brand, it provides the opportunity to retain and grow their customer relationships while enabling their members to support causes close to their hearts. Which, of course, benefits the charities receiving the donations. While this can be seen as a short-term step, adding this initiative to your loyalty programme really helps your brand to build emotional engagement with their members in the long-term.

An example of a company enabling customers to give back every time they shop is Allbirds. When customers make a purchase, they can help the company with their goal to become carbon neutral by choosing if they donate to land, energy or air initiatives.

Programme liability can be a delicate subject and we typically ask clients to partner up with their finance colleagues when looking for solutions to manage it and forecast for it. In the words of Peter Drucker, “What gets measured gets managed”. While managing costs is important, it’s also about respecting the opportunity and the customer relationship. Where before, it might just have been centred around sending out offers, promotions and discounts, now it is much more about building emotional connections. Working with your finance team you can find a solution that will work for your brand and for your members.

In Epsilon, we believe that to be truly successful in loyalty you need to consider everything from a customised strategy, a powerful platform and reliable day to day operation of the programme. Our PeopleCloud Loyalty solution is a market-leading end-to-end solution, and we’re the ONLY company that has been named a leader in the 2019 Forrester Waves for both Loyalty Technology Platforms and Loyalty Service Providers. This is a powerful validation for why the world’s leading brands trust our loyalty expertise. To learn more, please feel free to contact us.