#547: Winning the CFO’s Heart in Loyalty Finance

Last week we kicked off a month-long discussion of Loyalty Financial Modeling with Loyalty Academy™ senior faculty members Bill Hanifin and Aaron Dauphinee. Drawing from material in Course #105 – Introduction to Loyalty Finance, Aaron and Bill are walking you through the essentials that you need to know to break through the “black box” of loyalty finance.

This week, Bill goes solo and takes a close look at the assumptions that matter most for your financial model and how to create an assumption set that will pass the credibility test with your CFO and win the budget you seek. He shares the “check digit” questions that you must ask to make sure your model will pass the toughest tests with your stakeholders.

Each month in the Wiser Loyalty series, Bill and Aaron 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.

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.

Just before we share today’s episode, I want to ask you to sign up to the Let’s Talk Loyalty email newsletter. Our email newsletter is by far the best way for us to keep you up to date with all of the latest incredible loyalty stories we’re sharing each week. It’s also the easiest place for you to find our show notes with links to everything mentioned in all of the episodes. You can sign up at letstalkloyalty. com.

Bill: Hello everyone. I’m Bill Hanifin with The Wise Marketer. We’re back with the second episode in this month’s Wiser Loyalty series, where we tackle constructs from one of the core courses from our Loyalty Academy curriculum. And throughout the month of June, we’re talking about loyalty economics and loyalty finances, with the inspiration of this material coming from Loyalty Academy course number 105, Introduction to Loyalty Financial Modeling.

Now, Aaron Dauphinee, who’s my usual partner here in this Wiser Loyalty Podcast, is leading an educational session at the European Loyalty Association Hub event in Berlin that’s happening this week. So I’m here with you solo this week, but don’t worry. I mentioned that we’re talking about loyalty finance, and I’m going to be sure to deliver a strong ROI in exchange for your few minutes of attention this week.

So here we go. This will be fun. You know, we kicked off the series last week with a discussion titled setting strong loyalty, financial foundations, and you can find that as episode number 544 on the let’s talk loyalty website. Now, in that session, we talked about how to frame up your perspective on creating a financial model for your loyalty program and what you need to do on an organizational level to ensure that the planning process can move forward to successful completion with minimal friction and to get the kind of results that you really want.

Now, part of that, that we introduced 2 concepts, 1 of them was the idea of establishing a loyalty steering committee to guide the planning process. We also shared our recommended starting point for modeling, which is to create a base case in quotes. That mirrors the current operations of the brand’s business, your company’s business and to agree on a set of core assumptions before starting to dive in and build out a complete model.

So that was the foundation and this week, we’re going to build on that by discussing. We’re going to dig into the core assumptions that you really need to think about. We’re going to talk about which ones are important, and we’re going to talk about how those the assumptions react with each other and impact each other to drive a whole spectrum of outcomes in your model.

So, what you can’t see on my screen, but I’m looking at over here very colorful is a basic financial model that we created to be part of the final exam of our certified loyalty marketing professional courseware. And it’s a simple model, but it’s one that we asked the students to complete. And the first thing that we ask people to do is to build that base case.

So there, there’s an opportunity to put assumptions in to restate and sort of speak what the business looks like. And once you’ve done that, you can immediately, and you’ve got consensus around it, you can immediately move into talking about some assumptions. So 1 thing that we’ve all got to be able to agree on as we start to think about assumptions is that costs are easily identifiable, whereas assumptions are not.

So costs are hard numbers there, but assumptions are soft. They’re fungible. They’re subject to discussion and interpretation. And in some cases, mortal combat. So, personally, I’d prefer not to engage in anything as dramatic as mortal combat over numbers. And the smartest thing that marketers can do is to admit that it’s much easier to arrive at an agreement about costs, but take your time and talk about assumptions and try to try to work that out because there’s going to be a lot of give and take in those discussions.

So, to me, there are 2 path options. And the way we used to do this in the past was to go into a room, a planning room, and we had the whole team together. We would decide on assumptions, we would build our model, we would come up with outcomes, and then we would go and we’d approach the finance team, the stakeholder team, and we’d present our findings.

And we found a lot of times that that just didn’t work out that well. So what we recommend now to build understanding earlier to gain consensus, to be able to work out all the hard conversations up front. Is to work through the assumptions themselves and to start off your first meetings with the finance team and the CFO talking about assumptions, which ones are important, why they’re important, which ones in priority are more important than others, and then talk about the range of options and why and put the assumptions that you have about those numbers in the context of the business overall.

This is very important. So where do we start? Let’s get to it. Enrollment’s where we start. New program, got to have members, right? So enrollment’s where we start. And it’s really important to know you’ve got to have critical mass in your program to make it financially viable. If you don’t have enough people participating, the opportunity to create, create the incremental revenue that you need to offset the operating costs just won’t be there.

You’ll never get to an ROI. And I can hear some of you saying, yeah, yeah, yeah, Bill membership is great, but activity level is super important. Well, you know what? I agree with you, but you need to get the enrollment first. You need to get the critical mass in there. And as soon as you do that, yes, pivot your attention towards activity levels and start to work on that.

But let’s think about enrollment for a minute. Think about if you did your segmentation and you’ve got four key groups defined by value. You might even call them best, better, good, and fair. Questions for you. What percentage of your customer universe would you expect to enroll from each group? Do you think there’s a correlation between value segments and enrollment rates?

Uh, might there be a waterfall effect across? Would you have higher percentages of enrollment in higher value groups? Or might it be in some other order? What surprises can you expect from the enrollment process? Do you think there might be potential in the good and the fair groups? The 2 on the bottom?

Or do you think that most of your enrollment is just simply going to come from the top, most highly engaged, most valuable groups? There’s, there’s a lot of give and take in that discussion. And I’m not going to tell you that there’s one answer for all of that, but I’m going to tell you those are the questions you should be asking as you move on. You might say, okay, enrollment in a general way is one thing. What if we think about having a subscription or a paid tier in our program? What would that mean to the program? Are we going to have the same type of enrollment rates for a paid program as for an open free program? Well, no, you won’t. A lot of the experts that we talked to tell us that at the most, you probably will get no more than 12 to 15 percent of overall membership. Willing to pay a fee to join a subscription based program now, that’s perfectly fine. And that could turn out to be your most valuable segment in the entire group. But you’re not going to have 30, 40, 50 percent people enrolling out of a general population. So there again, something to think about and some, some sensitivity analysis to do around those numbers.

Once you tackle enrollment, you move on to maybe the most contested area of assumption building and loyalty marketing. And that is lift. The lift can come from more visits, from increased basket size, from more product penetration, from cross sell, from retention even. And I’ve had a lot of clients ask me the big question, how much lift will I get from this program?

They’re looking for one number to represent the value of the entire program. And sometimes we’ll even go so far as to say, well, can you guarantee me a certain amount of lift? Well, I found that over time that saying it depends was really not a good enough answer, but I also know that submitting to the temptation to quote one number for the entire program is a really quick path to destroying credibility.

So, again, you’ve got to look at different levels of the program, different groups of people, customers, and you’ve got to think about, the level of penetration that you’ll get for each of those groups and what kind of lift that you’ll get from those groups as well. And here’s the best way that I can describe this.

I was challenged by a client who said, you can’t tell me that you’re going to get a 12 percent lift across this entire audience. In fact, Bill, you, you must, you have to believe that probably a good portion of people you’ll get 0 lift from. And I paused and I thought about this. And I realized that she was right in telling me this, that there was a group of people that you were going to enroll and that you wanted to retain and they were highly valuable.

But you know what? You’re going to get absolutely zero lift from them. Maybe your lift comes from the 2nd, 3rd or 4th tier and on down, but you know what? To establish credibility to build your model in the right way, you should set lift assumptions by value group and by said customer segment that you have. Uh, as a result of the analytical work that you’ve done and only through that way, you get to the right number, but you’ll also build credibility with the people that you’re trying to serve really well.

So, to kind of wrap this up, you know, the other key assumptions and we don’t have time to go into these in great depth, but the other key assumptions after enrollment and after lift. Would be, what do you allocate towards rewards funding? What kind of breaker traits would you have? What kind of operational costs do you expect to have?

There are a few more and those come together to ultimately create, um, what we call a loyalty program benefit or contribution margin from the loyalty program altogether, they, they come down to a net net number, uh, this can contribute to the enterprise. And, you know, what I’d say about this is that for way too long, marketers Thought about this early part of the modeling process and the discussion of assumptions like a zero sum game.

They had the ideas and they needed to win, and if they didn’t win, and if they weren’t accepted by their stakeholders, then they’ve lost. So they took a defensive posture in talking about lift and all these other assumptions. And I really feel like today, Don’t blame the finance team. Just accept that they have a job to do.

Um, understand that they’re evaluating alternative uses of capital, and you’re not the only game in town. So your program needs to be well conceived. You need to have your set of core assumptions well thought out. You need to have sensitivity analysis built around them. And you have to present your case, in their world, in their eyes, not just yours. That’s key to success. So one more thing. There’s a concept in credit card security protocols called the check digit. You might be familiar with that. If you’ve worked in the payments business at all, and in loyalty marketing and the modeling space, I think the check digit, equates to a number of questions you have to ask yourself. So when you finish your modeling and you get an outcome, sit back, ask yourself some of these questions, and you’ll know whether or not your model results are on target. Ask yourself. What percentage of your customer base overall, are you expecting to enroll in your program?

Um, does that number stack up as a common sense test? Does it stack up to industry standards and what you would call best in class programs? If your number is way below or way above, you have probably some work to do. You might also want to ask yourself how much revenue is represented by the customers to the whole.

Is the number reasonable? Is that is that your most important metric? There’s been a lot of talk about that and some debate around the veracity of that number, but it’s important one to ask. And then does the overall revenue or the sales lift from your projection ultimately represent a figure that can make sense to the business? If you talk to the CEO. And the CEO is telling you that due to economic conditions and competitive nature and all sorts of other factors, he’s expecting, or she’s expecting a single digit growth rate over the next 18 months. And you walk in with a loyalty model that shows 20 plus percent growth just from the loyalty program.

You probably have a credibility gap and you’re going to have a lot of explaining to do. So get ahead of that game. Understand what the business is expecting, what they’re looking at in their crystal ball. And when you finish your modeling, look at your results and see if they align with the way the enterprise is looking at the business.

So, you know, we covered a lot in a short period of time. I hope you enjoyed this next week. We’re going to dig into some of the other check digits that I mentioned, and we’re going to talk through the elements of a measurement dashboard that you should have. To monitor the ongoing operation of your program.

So we’ll see you next week, is this exploration of loyalty finance continues on the wiser loyalty series, which is part of Let’s Talk Loyalty. Stay loyal always. And we’ll see you next week. Bye.

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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