Loyalty Programme Business Structure and Modelling - Implications of IFRIC13
Over the past few years, Barry Wright has been responsible for deriving and recommending the organisational and reward structure for a number of major reward programmes in Europe and The Middle East.
Management of these has been recommended in line with IFRIC13 Customer Loyalty Programmes accounting guidelines, which finally came into force in July 2008.
The Management structure of a loyalty programme within an organisation, can dramatically affect where the costs of the programme are born, the balance between taking reward costs at the initial purchase stage or when redemptions are made and how liability for the future redemption of reward points/tokens is accounted for.
The management structure of reward programmes is particularly important where the loyalty programme runs across several “independently accounted” companies or brands and/or on an international basis.
Methodology and Outputs
Our approach is to first clearly establish the Key Objectives of the companies’ senior management, how the loyalty programme can help meet these objectives and what KPI’s will be used to assess the progress of the programme.
This leads to the construction of a structural “blueprint” of the programme and its management. This details and costs the programme structure elements.
Finally a 5-year business model is constructed for the programme, either starting from launch, or incorporating the legacy situation of an existing programme under the new programme rules and accounting procedures. These models are interactive with a range if variable inputs from members numbers, to reward levels, spend, redemption levels, points / membership expiry etc..
Customer Loyalty Programmes are now “a part of doing business” across the world. All business sectors including travel & hospitality, retail, telecoms, B2B services and financial services, are represented by a wealth of programmes which in the most part offer incentives, in the for of rewards, to their members.
Loyalty, in common with many marketing initiatives, is seldom assessed on a business basis in terms of its contribution to company profitability – indeed, the accounting practices used to account for loyalty expenditure, display a huge diversity. Often, all reward costs are allocated to the “earn transaction” without any account taken of either the “value of the redemption transaction” or the “costs to the programme or the redemption outlet”.
The key recommendation surrounds the concept of “deferred value” and its representation in the balance sheet;
Put simply, reward points or credits that are issued to members of a programme, are a liability for the future, when costs associated redemption will be incurred – as such, the potential future costs should be reflected in the balance sheet of the company operating the programme and responsible for the payment of these costs.
The cost of points or “award credits” issued should be split between
· The goods or services delivered in the “earning transaction”
· The award credits that may be redeemed in the future
IFRIC13 states that this consideration should be allocated to these two areas based on the “fair value” of the credits. The consideration (costs) awarded to the redemption transaction should be presented as “deferred revenue” and presented in the balance sheet.
The structuring and management of a loyalty programme, within a business, can have significant implications on the apparent, and real costs of a loyalty programme.
This is turn can dramatically affect the way in which the programme is perceived and assessed within the company, and at its most basic, the proportion of revenue allocated to rewards, thus affecting the fundamental “richness” of a programme and its “potential value to members”.
The IAS paper can be found on the web at http://www.iasb.org/Current+Projects/IFRIC+13+Customer+Loyalty+Programmes.htm and
http://www.fwsb.de/cms/downloads/IFRIC13.pdf .Price Waterhouse Coopers have produced an excellent paper, IFRIC 13 - Accounting for customer loyalty programmes which can be found on the web at
Own versus 3rd Party Rewards
There is a significant difference in accounting treatment between a company which supplies its own rewards and one which purchases reward services from a 3rd party.
1. Where rewards are purchased from a 3rd party, recognition is made by the entity issuing the points, of the cost of the reward points when they are purchased, and recognition of any income accruing when points are redeemed with them for goods at some point in the future.
Where rewards are provided by a third party, the 3rd party will recognise the income from their issuing partners as revenue but must provide against the costs incurred when members redeem their points at some time in the future. The 3rd party is allowed to decrement the value of points accrued by members by a factor reflecting the likely level of redemption / non-redemption of these points and the costs incurred through payment to 3rd parties for the fulfilment of these goods/services.
2. Where a company issues and redeems points on its own behalf, the consensus appears to be that the ‘fair value’ of the rewards, when such rewards could be redeemed in the future, must be reflected in the accounts as a cost of the initial sale and when the points are redeemed, as an income.
IAS18 and Fair Value
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.
Implications for Loyalty Programmes
Where a single company issues reward points for the purchase of goods and services, and redeems these points at some point in the future, the company will bear a cost against the original sale reflecting the ‘fair’ redemption value of the points at some point in the future and the ‘fair’ income from redemption of these points for their own goods and services when this occurs.
Where points are issued by a third party on behalf of the company, the purchase of these points and the subsequent redemption, becomes a separate transaction divorced from the value of the original transaction and is based on the agreed ‘purchase price’ of these points and ‘redemption income per point’ to be received from the 3rd party when goods / services are supplied from them in response to the redemption of a number of points.
Vilfredo Pareto (a nineteenth century economist and sociologist) observed that
a relatively small number of causes are responsible for a large number of effects, usually on a
ratio of around twenty percent to eighty percent. This is now known as the Pareto Principle, or
the ‘Vital Few and Trivial Many’ rule, and has been validated in a wide variety of environments.
It also holds true in the business world today. For most firms, around twenty percent of customers generate eighty percent of profits,
and the top 5% of customers generate 20%-25% of profits!
Those businesses that haven’t identified these high-value customers are missing a key opportunity to supercharge their profit margins.
There are many treatise explaining the
difference between a satisfied customer and a loyal customer. I
admit to being a fan of Fred Reicheld over many years and these
two recent articles are excellent summations of the differences.
Customer-satisfaction numbers don't show a consistent
correlation with actual customer behavior and growth, according
to Bain's research. -Fred Reichheld
For a fuller account of the connection between
net promoters and growth, please click here to view "The
One Number You Need to Grow," by Frederick F. Reichheld,
published in Harvard Business Review in December 2003.
Loyal Customers are Profitable Customers - Basis of
Profitability from Customer Loyalty initiatives
operates on the premise that loyal customers:
Have a higher average purchase value, they
commit a greater overall Share of Wallet and are more likely to
cross-purchase other products and services from the company
Are less likely to defect and given that it
costs 5 x as much to acquire a new customer than to retain an
existing one (Bain & Co), over time loyalty initiatives can
bring very significant savings across the marketing budget
Communications Costs - Loyal Customers are more
receptive to communications from companies to whom they are
loyal, bringing significant cost efficiencies -
Advocacy - The basis of the Bain Articles above,
promoters (those who recommend the products & services to
others) are the real basis of growth and profitability of a
As I stated above there are many models of
customer loyalty. Here are summaries of just 2 very simple
models which I have found invaluable over the years
The 4 R's
Recognize your best customers at every
possible occasion - reinforce their sense of
"worth" in communications, service delivery,
customer service etc - remember "all customers are
not equal" so the value of the recognition TO THE CUSTOMER
should be appropriate to the CUSTOMER'S VALUE TO YOU
Reward your customers for their custom - this
may be "points", "service benefits",
"special privilege offers" etc etc - remember
"all customers are not equal" so the value of the
reward TO THE CUSTOMER should be appropriate to the CUSTOMER'S
VALUE TO YOU
If you reward and recognize customers
appropriately, you will retain a greater proportion of your
valuable over time
Your customers will recommend your
products/services to their friends - i.e. become advocates -
this is the best form of promotion for your company that you can
Assessing the potential ROI of a Loyalty Initiative
Over the years, one of the most difficult things
to derive at project development stage, has been how to assess and
present the financial opportunity of a customer loyalty approach.
have now developed a number of profit/ROI models for companies as
diverse as Eurostar (pan European) and
AlFuttaim in Dubai.
address a whole range of input costs (development, running and
reward costs) against potential scenarios of increased revenue.
The outcome is
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