"What can we do?"
This is the question countless businesses currently face amidst reduced cash flow and mounting uncertainty about the future.
While the current circumstances are largely out of your control, there are still some vital opportunities for you to take ownership of your business and navigate your way out of this crisis. If your business has a loyalty program, for example, you can leverage it to engage customers and support your financial recovery once things return to "normal."
To be clear, no loyalty program can immediately reverse the effects of this crisis. No matter how rich of a promotion you offer, today's circumstances are just too extreme to spur any significant demand. The real opportunity for growth lies in your business's recovery phase. When you're allowed to return to "business as usual," your loyalty program will help you:
- Add momentum to your recovery efforts
- Re-engage your best customers
- Capture the maximum amount of pent-up customer demand
Here are our top tips to help you harness the power of your loyalty program and kickstart your financial recovery.
Pause loyalty point expirations
Pausing loyalty point expirations makes financial sense right now. Here's the logic: your program liability assumes an expected breakage rate, which means you've already deferred revenue based on expected costs from your assumed rate. Therefore, you've technically already incurred the financial cost of those points at the expected breakage rate, but haven't incurred the actual cash outflow to fulfill the redemption yet. In other words, you have money to play with!
You'll likely see much higher breakage on your outstanding points if you don't pause point expirations because customers cannot spend points at the same rate as they normally would. As a result, you'll have much more liability on your balance sheet than what you actually need to cover redemptions in the future.
So be generous; pause expirations and keep points in members' accounts. This will put you in a better position to use those points as an incentive to drive demand when your recovery starts.
Incentivize customers with points and benefits
Points and other program benefits (i.e. tier status) keep people coming back to buy more — which will be vital to your recovery.
For example, some customers are willing to spend hundreds (even thousands) of dollars on a last-minute flight to get the miles they need to keep their tier status. There are other customers that aren't chasing tier status, but love earning points. For these customers, earning points is incredibly rewarding, and they'll be fiercely loyal to get them.
People love their points and their tier status and their behavior reflects that. Even for the average person, behavioral economists that study goal gradients have found loyalty programs to be an effective way to drive behavior.
Tier status in particular is a powerful incentive mechanism. But tier status must be attainable in order to be an effective motivator of behavior.
This means, keeping tier status attainable and making sure members have points in their accounts will help incentivize members to spend when things return to normal.
Take advantage of delayed cash flow benefits
Because cash coming in has dropped significantly (in some cases, to zero), cash flow has become a major concern for many companies right now. In this situation, each dollar that goes out is one dollar closer to bankrupt.
The beauty of loyalty points is that there is a delayed cash flow impact due to the time lapse between when a point is earned and when it's redeemed (which is when the cash flows out to fulfill the redemption).
Here's an example of how that works:
- Cash flows in from a member's purchase
- A portion of the revenue associated with their purchase is deferred to cover the cost of their eventual point redemption (as per ASC 606 and IFRS 15, the relevant accounting standards)
- The liability is increased on the balance sheet by the amount of revenue deferred
Notice that there is no cash outflow when a point is issued; you'll only see the cash flow out when you have to fulfill the redemption, which can be months or years away — hopefully when the current crisis and subsequent cash crunch are long gone.
With this in mind, you can see how points are a great promotional tool that won't further exacerbate your cash flow problems. This is an important distinction from coupons or discounts, both of which will decrease the price of the purchase and reduce the amount of cash coming in; the cash impact for these promotions is immediate.
Consider perceived point value
When it comes to promotional offers, points can have a larger perceived value to customers than coupons or discounts — a huge asset to your company right now.
For example, a $5 dollar coupon has perceived value and cost of $5 for both you and your customer. In contrast, 500 points can have a perceived value of $5 for the customer, but an actual cost of $1 for your business.
This means that point-based promotions can provide a better economic return than coupons or discounts. During your financial recovery, these promotions will be a powerful tool to engage your customers while saving costs in the long run.
However, keep in mind that some members value points more than others. As such, point-based offers will be an effective incentive for some customers, and coupons may be much better for incentivizing others. Knowing which members fall into which bucket is critical (more on that later).
Promote long-term buying habits
Another reason to favor points-based promotions over coupons or discounts is that they drive long-term, revenue-earning behaviors from your customers. For most programs, earning enough points for a redemption requires several transactions. Coupons or discounts, on the other hand, can be used immediately and provide little incentive to keep coming back.
This means that points-based promotions provide a better impact on customer lifetime value than coupons or discounts. Because of this, it's easier to justify richer points based offers to members because the benefit of multiple future transactions can be included when you calculate the ROI of the promotion.
Optimize the ROI of points based-promotions
As noted above, the effectiveness — and subsequent ROI — of points as an incentive to purchase will differ from member to member. The higher a member's perceived value of a point, the more likely they are to be incentivized by points. The lower a member's perceived value of a point, the more likely it is that coupons or discounts will be an effective incentive mechanism.
For members that value points, a key dimension to keep in mind is how close a member is to a reward. Some members will be close to earning a reward, so providing a point-based offer that is too large may allow them to immediately get the reward without any additional spending. The ROI of the promotion for that member will likely be very poor.
To avoid this, you'll want to structure the size of the point-based offer to be generous enough to incentivize customers, but not so generous that they can automatically cash in on a redemption. The point is to move members closer to a redemption, but leave it up to them take the final step to get there — a purchase!
Using loyalty for recovery
Acquiring new customers is expensive; leveraging the ones you already have can help keep costs low and increase demand when you need it most. Crafting the right offers for each customer during your financial recovery will compound your efforts and ensure increased engagement. This leaves us with two important questions:
- Who should get points based offers and who should get coupon/discount based offers?
- For those who get points based offers, how rich of an offer should you make?
To find out how to leverage analytics to answer these questions and make the most out of your financial recovery efforts, download part II of this series: 7 Loyalty Program Tactics for Financial Recovery CFO's Will Love.