#553: Adventures in Loyalty Financials – Sharing some good, bad and ugly

Each month in the Wiser Loyalty series, Loyalty Academy™ senior faculty members Bill Hanifin and Aaron Dauphinee draw a theme based on the courses required to earn the Certified Loyalty Marketing Professional™ (CLMP™) designation, which is nearing 1,000 individuals across 53 countries worldwide. This month, they are talking about financial planning for loyalty programs and the material is based on the Loyalty Academy™ course: Loyalty Financial Modeling (#105).

Throughout the month, we’ve covered the ecosystem of considerations needed to create a solid financial plan for your customer loyalty initiative. To wrap up the conversations, we share a few examples from work with clients that tie together the concepts shared, illustrate key planning steps, and reemphasize the need to work cross-functionally to have the best chance of creating a sustainable program structure.

Show notes:

1) Bill Hanifin

2) Aaron Dauphinee

3) The Loyalty Academy™

4) The Wise Marketer

Audio Transcript

Paula: Welcome to Let’s Talk Loyalty, an industry podcast for loyalty marketing professionals. I’m Paula Thomas, the founder and CEO of Let’s Talk Loyalty and also Loyalty TV. If you work in loyalty marketing, you can watch our video interviews every Thursday on www. loyalty. tv. And of course you can listen to our podcasts every Tuesday, every Wednesday, and every Thursday to learn the latest ideas from loyalty experts around the world.

Today’s episode is part of The Wiser Loyalty Series, which is hosted by our partners, The Wise Marketer Group. The Wise Marketer Group is a media education and advisory services company providing resources for loyalty marketeers through the Wise Marketer digital publication and The Loyalty Academy program that offers the certified loyalty marketing professional or CLMP designation. I hope you enjoy this weekly podcast, The Wiser Loyalty Series, brought to you by Let’s Talk Loyalty and The Wise Marketer Group.

Aaron: Hi everyone. I’m Aaron Dauphinee, the CMO of The Wise Marketer Group, and I’m here with my co host and our CEO Bill Hanifin to share another episode of The Wiser Loyalty Podcast with you.

Uh, we’re back to the final episode of this month’s Wiser Loyalty Series, where we tackle constructs from one of our core courses, uh, from The Loyalty Academy curriculum. And throughout this month of June, we’ve been talking about loyalty economics and loyaly finances. And most of our inspiration is coming from the course number 105, which is Introduction to Loyalty Financial Modeling.

And this final episode, we kind of wanted to change things up a little bit. We wanted to share a few real life examples from the work that we’ve done over the years, as well as some current examples of what’s in the news at the moment, to bring this financial topic to life, if that makes sense. So, uh, with that, uh, I, you know, we want to make sure that, uh, We’re always hearing from you, and we’d love to hear from your feedback if this works, because it’s a bit of a divergent from what we’ve done in the past.

So, Bill, maybe you can kick off with a couple of examples for us today.

Bill: Yeah, I’m happy to do it. Good to see you, Aaron.

Aaron: Good to see you, Bill.

Bill: One of the most complex situations that I’ve been involved in was this coalition program that was in Jamaica. It was in a state coalition, so it was a conglomerate company that was a 100 year old company, 1 of the oldest in the Caribbean, headquartered in Jamaica.

Yeah. And the story goes that the CEO was at a shareholders meeting and he proclaimed that he wanted to have a loyalty program across all of his brands. So he put the goal out there in front of the public. And then eventually we were the ones, um, selected to work with him, but he, you know, what was interesting is we had everything that we asked for in a CEO. That was a big advocate of the program and the plan. But what I didn’t realize at the time is he had not necessarily gotten the, um, buy in of all the individual business leaders. So they had a bank. An insurance company, they had a money transfer business. They had a retailer. Uh, they had a number of businesses, all diverse, different purchase cycles.

It was, it was complicated and different profit margins to, by the way, like, minuscule on money transfer much bigger on retail. You can imagine. So. We learned we learned along the way, there’s no such thing as this whole idea of the loyalty steering committee. But if I wonder where the seed was planted, it was probably from that because we got in many meetings.

And as we started to go around and explain the concept, and here’s the plan for the program to the different business heads. It was like, starting from scratch. I felt like I was doing a cold call. So we went through that process and then we even had gone down the road a little bit and we found out that the bank, was well into planning their own rewards program and we had no idea until it was down the road. So here we are creating this multi tab, very complex financial model. And then we find out, like, whoops, the bank has its own program. Oops, this, this other company is not in favor of it anyway. And then, but 1 of the, here’s 1 of the key things that we struggled with mightily the whole idea of, let’s say the consumers are probably going to earn mostly at the bank and in the grocery. They owned a grocery as well in the grocery and maybe in the retail setting, not as much did they transfer money or only once in a while, do you buy an insurance policy, something like that. And so there’s a lot of concern about, well, you’re going to earn all the points over here in the grocery.

And then what happens if they bring them all into redeem at the hardware store? And for some reason, we had a really hard time explaining. Um, That those points turned into value like cash and when you used them at the till, it was no different than somebody buying a set of tools for, you know, 30 dollars and those points could account for the 30 dollars and you were going to get properly reimbursed. You’re not going to lose any margin, but boy, was that a hard concept, and there was so, so there’s just, um. That that whole process was made much more challenging by the fact that that buy in wasn’t there from the very beginning. And then we had to explain the concept over and over and over. Now, one other thing I’ll just tell you, and then we’ll jump back because I know you’ve got a good example is I got a panicky call one day from the client, and they said, I am in so much trouble. I’m doing a quarterly report and we just realized that our redemption costs are way beyond our budget. What am I supposed to do? And that’s the way they posed the question. And I said, well, why are they are? Why are they higher? And then, as we dug in, we realized that enrollment had gone way beyond what we projected.

So the program was doing really well in the engagement was higher than we thought. And there were many more redemptions. And so guess what reward costs were higher, but when you took the collective metrics and you realized what’s happening in the program, okay, we had a good story to tell, but it, it, it was a great illustration to me of how somebody can take one number out of context or look at a number that jumps off the dashboard and absolutely go into a panic.

And then the panic’s not warranted, you know, sometimes it is, but it wasn’t in this case.

Aaron: We talked a little bit about that last week. So that’s a good time with last week’s episode for sure.

Bill: Yeah, absolutely. I can tell you one other really quick story, and then maybe you can tell me. I know you have one, good one in Canada, but, um, just very briefly, we did work on a bank in the, in the Caribbean. I’ll just say, but it was a Spanish speaking Caribbean, and it’s a situation that we’ve seen a lot. And I think you can probably endorse this idea of the ask was, can you do an assessment on what our liability is for our credit card rewards program? Okay. So, by the time you dig in, and you do all the analysis, we realized that they really didn’t have a dedicated reserve methodology and that they were taking expenses, redemptions happened. And so the expert that we brought in to do this assessment. Had made a calculation and it was pretty clear that it might have been a, I mean, a gigantic number. Let’s just say 10s of millions of dollars without being more specific. And and so, you know, it was going to reflect really poorly on the people are running the program.

It’s going to cause a problem on the balance sheet. A lot of problems. So what did they do? They acknowledged it. They thanked us and they said, we’re going to keep doing what we’re doing. But thank you very much for your hard work. And I’ve seen that in many instances having you where. It’s a still surprisingly a little bit of a Wild West, or there’s just a lot of very I’ll just say there’s a lot of variability and how companies will account for their reserve liability.

Aaron: I like that a lot of variability in it. That’s for sure. There’s, there’s no set standard way. I mean, there’s more of, but oftentimes you still have those divergence that stick out. Interesting. Yeah, Hey, if I think about something from Canada, I think about the longevity of the industry and in the Canadian marketplace, you know, like, um, uh, loyalty has been a long standing part of our ecosystem here and and if you think back to, you know, some things that we take for granted.

You know, setting up your initial accounting systems sometimes can last an impact on your balance sheet. And so what I mean by this is, you know, I was part of an organization where, as an example, um, you know, if your points redemption from your finance team sets it up as last in first out account for points redemption, then you can have some challenges that you face with your member file in that the first miles that are earned don’t get utilized. Through the points of a redemption and so a much better accounting structure, obviously, is firt in first out so that you’re, you’re drawing away from that first, a set of miles that’s put down, they’re not just sitting on the on the balance sheet. And so, um, when I, and that’s and for us, I think in the industry now that that type of accounting system makes just logical sense.

But, you know, 30 plus years ago. When you’re first, you didn’t know what you didn’t know, because you didn’t know the long term ramifications on on the economics of your program. And and so one of the only ways to get those points being used by your members is either to get them to redeem or in another way is to actually start to expire the points.

Right? And so, um, you know, putting in an expiry points clause in the program can be sometimes a contentious, contentious thing. And oftentimes it’s not with your best customers because they’re redeeming and utilizing and engaged. But certainly with that long tail that we’ve talked about in your program bills. And they become a bit of a squeaky wheel, so to speak, and I know for me, I kind of ride both sides of the fence here. I can see the reasons why the program would want to put the expiry into place because it makes economic sense. And it’s just practical based on some previous decisions that they just didn’t know.

But then on the consumer side, they’re saying, hey, well, this isn’t really fair, but it depends about how that fairness comes about. I think, to some degree. And how much, how transparent you are in terms of providing the information to that customer. So, so we saw that here in Canada with the air miles coalition. And again, so we’re talking about a bit of coalition programs here. It’s something that propriety programs don’t have these issues too, but it just happens to be that way. But, you know, they introduced their expiry program, um, way back in 2011, I believe it was. So, and then he gave their customers like a 5 year runway. A great amount of time when you think about it, like, if you haven’t run enough in that period of time and accumulating, you really are on that long tail.

And so, you know, from that, the logic behind it was very sound. So, by the beginning of January, that would make it 2017. they were going to start to actively expire these points and and and sure enough, the one thing that they, you know, I mean, it’s always the, what the member says, versus what the program says, and, you know, it’s the once experience the other experience and in the middle is the truth somewhere.

We won’t get into those dynamics, but the point being, I’m around to the beginning of 2016 and of course, the media gets a hold of this. Um, and then by the time we arrive at summer, 2016 support program has been battered and bruised because the, you know, the, the outcry from saying, you know, this just can’t be the way it is.

I’ve earned for 10 years and I still haven’t got my redemption. Well. And you got to shake your head a little bit of that from the member and say, like, we’re not engaged. So that’s the issue of itself, but the entitlement to rights around having those, those points that are there was quite strong and sticky here in Canada, because we are a loyalty environment.

So, it became a bit of a PR bombshell, and I think is the fair way to describe it. And, um. And it certainly didn’t help to, you know, the program did institute some other changes when they declared, um, that, uh, they put in a program called Cash, uh, redemptions or mile redemptions. So mile redemptions being for points, um, for flights or for points for merchandise that you could redeem for and the other direct cash.

And so they did that in 2012. And they also said any points earned prior to that, you know, wouldn’t be able to, you know, I wouldn’t be able to, uh, redeem for the cash side. So you were forced into the, the flights and merchandise side. So there was a bit of, um, guidance that maybe, you know, could some ire in addition to just expiring the points.

But, but the point being, you know, that there was really, um, when members went to, you know, use these points because they were under the gun to some degree. They also found that they couldn’t get all the rewards catalog that they want. And I believe it was an idea to curate for the member of what was relevant to them.

But by having these things missed, the company kind of was setting the standard of what you could redeem for it versus what you couldn’t. So, you know, layer on layer on layer of things, uh, compounding in terms of the experience for the member. And you fast forward to December of that particular year, and, um, you know, based on consumer feedback and actually some impending government legislation, one of the governments here was about to pass legislation to make points, expiring illegal, um, so at a decision by one company in the industry to affect the entire industry, potentially, in terms of the way it was managed. You know, that can really spiral. So, um, you know, it’s one of those things where you got to keep in mind, like, you affect others around you.

But all of the point about this is, is, you know, there was a decision around some economic structure in the beginning that led to this downstream many, many years later, but by the time December came around, the program said, hey, we’re going to cancel this expiry policy and relook at how we can put it into place, you know, to benefit our members.

Um, but they announced that they would take about a 215 million hit when they canceled the expiry program. So, so that’s, you know, this is a really good case study, quite frankly, for, for the industry as large outside of Canada, even, but particularly in Canada for about how you manage the members expectations around putting in these types of clauses that financial impact about being transparent and not always letting the finance team drive the decisions, but having that steering committee, but other people to come into play to kind of give that that balance.

So, um. Right, right. For me, I do believe that they needed an expired program because of the way it was structured, but it was just a poor sequence of events. Unfortunately, that created maybe a bit of a titch of apathy on their part for not reminding people was taking, but, but all those events could have, you know, really could have had that have had frankly, long lasting in marketplace.

Bill: When you say a much more dedicated, expressive communication plan could have headed off a lot of their trouble.

Aaron: Yeah, I mean, it’s it’s it’s easy to do the what ifs from the sidelines for sure. But I 100 percent agree. I think the transparency. So that’s a really good good way to describe exactly what I was trying to get out there bill in terms of just that open transparency communication with members and and getting them some something of value.

But again, that’s. It’s the economics, you don’t want to get a full run on the bank, so to speak, because you have your economic set of a certain redemption rate. And so you want that to maintain, even though you have these other structural things that you need to fix along the way in the program.

Bill: Right.

Aaron: I know we had another one, but I think with time between your examples in mine, we’re probably getting near the end.

So I think, you know, hop in here where it makes sense. But I think, as we summarize this series, we’ve got that more collaborative approach to financial planning is kind of a key takeaway. Right. Um, in making sure that you include the CFO early in the process and learn to speak their language. That was another element that we talked about through the series this month.

Um, the cross functional collaboration is really that winning model of getting to that steering committee mindset, not only at the initial set when you’re building equipment, but on an ongoing basis. And then, of course, measuring constantly to avoid surprises, um, you know, the industry, should be walking the walk as we talk the talk, so to speak, when it comes to analytics and reporting. And then the last would be, you know, as you start to change certain programs to improve your finances or your economic balance sheet, make sure to always consider the customer’s point of impact. Um, you know, and and that might have impacts in ways that you hadn’t anticipated. So be prepared to shift and adjust. And sometimes the consumer does win, even if they are the squeaky wheel. Unfortunately.

So that’s right. That’s right. Let’s put it there, I guess, right? That sounds about good. We’ll be back with a new topic next month with customer value proposition on The Wiser Loyalty series as part of Let’s Talk Loyalty, but for now, as always, Uh, stay loyal.

Bill: Okay. Thanks, Aaron.

Paula: This show is sponsored by Wise Marketer Group, publisher of the Wise Marketer, the premier digital customer loyalty marketing resource for industry relevant news, insights, and research. Wise Marketer Group also offers loyalty education and training globally through its Loyalty Academy, which has certified nearly 900 marketers and executives in 49 countries as certified loyalty marketing professionals.

For global coverage of customer engagement and loyalty, check out thewisemarketer.com and become a wiser marketer or subscriber. Learn more about global loyalty education for individuals or corporate training programs at loyaltyacademy.org.

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