Getting Rid of Dead Weight: Unredeemed Rewards and Loyalty Liability, Part Two

Sep 24, 2012

Something we think about a lot at Kobie is: Loyalty liability, or to the laymen, the accumulated miles and points that go unredeemed by millions of loyalty program members. It’s important to realize that it’s not only a major stumbling block toward true profitability, but it presents a financial reporting nightmare, as well.

Loyalty program designers and the companies that implement them have quite the accountability conundrum. Say your loyalty program nets one million dollars in revenue. But if $300,000 worth of those loyalty points are left unredeemed, the $300k appears as a massive “dead weight” on the balance sheet. In the case of loyalty programs, money not spent is money lost.

Earlier this month, I wrote a blog post that began to dig a bit deeper into this troubling issue. Of the $48 billion in loyalty rewards doled out each year, $16 billion – or 33% – is left unspent, further adding to the dead weight that loyalty programs dread. How can they overcome this? One recommendation is taking the omnichannel loyalty approach to maximizing cross-channel marketing with an emphasis on driving cumulative loyalty-related outcomes—not through a single campaign, but through a lifetime of ongoing campaigns that speak to that customer and engage them within the brand through preferences they set. If we can find a way to continuously engage our customers, provide them with great experiences and rewards that represent real value to them, then we’ve won half of this “dead weight” battle.

My post also referenced a study which found that liability costs are loyalty executives’ number one challenge. If such is the case, then the survey revealed yet more disturbing news. The FASB (Financial Accounting Standards Board) is considering a revision to its accounting guidelines that calls for a single, comprehensive revenue recognition model that according to the CEO of Swift Exchange, Richard Postrel, “Will have a material impact on all reward providers, who will have to significantly change how they account and reserve for their programs.” He goes on to characterize the pending 2015 changes as “highly disruptive” for older loyalty providers.

Yet when asked about these developments, 43% of respondents hadn’t examined the proposed changes in detail. My point? Recognizing there is a problem in the way in which loyalty points are accounted for. Failing to act and address those changes after fretting over them is pretty foolish. Equally short sighted is failing to stay apprised of accounting practices that have a direct impact on how loyalty programs report their financial health. If 43% of loyalty executives have admitted to not being in the know on this subject, there is probably at least another 10% who feel the same way but haven’t gone on record.

It’s hard to say why a number one concern amongst loyalty executives isn’t yielding a number one reaction yet. Perhaps it’s because 2015 feels too far away. But consider this blog post a reminder – or nudge – that raising loyalty’s revenue anchor and relieving its dead weight girth requires both re-structured loyalty programs and intimate knowledge of how our finances must be reported and accounted for.