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Valuation: Being Prepared for the Ultimate CEO Question

Loyalty programs attract more executive attention than almost any other marketing initiative. If you have a points program, liability will be an often-revisited conversation. If you include discounts or introductory offers, questions of margin erosion and cannibalization will follow. And, during an engagement boom, there are universal inquiries into the effectiveness of loyalty programs’ most valuable component: time interacting with the customer. If executives can’t get answers to these questions initially, there will be a lot of questions and potential changes to follow.

These aren’t small questions and they are being asked by big roles, and for good reasons. The value of loyalty can easily get lost in these conversations and companies end up making decisions without all of the necessary information. One of the biggest issues that leads to this scenario is when a program manager cannot translate loyalty mechanics into enterprise value, followed by the ability to speak in terms that matter to the senior executives. This article is meant to help you operate as if your next conversation was with the CEO.

It’s imperative to know that there are many good things that come from loyalty programs. Increased enterprise value occurs when stock price goes up, revenues improve relative to cost and positive growth happens faster than it otherwise would have. A quick review of your college finance books will remind you that these are all the same. Increased enterprise value means the company is wealthier.

The first part of being prepared is having your facts straight and knowing that not all information will be received equally. Of course, the CEO cares about all aspects of the company. However, their job is to drive wealth to shareholders, so you’ll need to speak in a way that helps them do that. Separating things that influence value (a great customer experience, positive reviews, etc.) from things that denote value (incremental sales, assets, reduced cost, etc.) is an important part of teeing up your conversation to be useful in making informed decisions at that level. Note that some organizations have value drivers that are understood to be strong substitutes (NPS, foot traffic increases), however these aren’t consistent across organizations and are often difficult to get credit for.

The following will help program managers tell a more complete story, identify areas to research and consider additional internal partners when making decisions.

Focus Area 1: The Value of Marketing Activity – Finding the green that sticks.

There is a saying in business when we get caught up in the good things we are doing and wondering if they’re worth it: “at the end of all of it, we’re measured by the green that sticks.” In program valuation, we see several adopted methods to determine what that really is.

– The net present value of incremental cash flows from campaigns and promotions. Measure the benefit that comes from an addressable member base that otherwise would not be addressable without loyalty communications and information.

– The net present value of incremental cash flows from membership. What you are measuring here are the increases in spend (or decreases in costs) among members who hold similar attributes as customers who are non-members. Control groups help significantly, but there are methods to compare like groups if you can’t have one due to the nature of your business.

Focus Area 2: The Value of the Asset.

When discussing valuation, be sure to remember the value that occurs outside of your department. Implementing a loyalty program is a large undertaking because it often requires building a technical infrastructure, a communications network and a business network. Each of these are difficult but not impossible to evaluate. The value of the immensely important business assets should be considered in light of the next best alternative use.

Focus Area 3: The Value of Data.

Something that isn’t popular to hear is that not all data is useful. In fact, spending too much time on the wrong information can be downright distracting. This is such an important point that The Harvard Business Review’s January / February 2020 issue has an article dedicated to the subject of When Data Creates a Competitive Advantage.

Among the most valuable data is the data that helps you develop better products and services, data that can be leveraged to drive lasting lift and data that can be monetized in a transactional way. As the owner of loyalty data, program managers should take an active role in driving value from data collected as a result of a loyalty program. Program managers should be able to articulate readily:

– How loyalty program information is being used in the organization

– How that information (data and insights) is monetized

– How the richness of the information and the ability to monetize is growing

Expanded context. The halo effect of getting good at capturing, sorting and telling the story of enterprise value is a program manager that has greater influence on the organization. As program managers explore these focus areas, the context by which the loyalty program operates also expands. As you develop your skills, invite other parts of the organization to get involved.

 

 

David Andreadakis

David Andreadakis