Customer loyalty programs are a tried-and-true way of invigorating your business. They increase sales, drum up customer engagement, and bestow companies with a window into the preferences of customers at the individual level.

From the customer’s perspective, loyalty programs demonstrate how much your company values their business, and can tip the scale in your company’s favor when they’re deciding between you and a competitor.

However, for loyalty programs to bear fruit, they must be carefully cultivated. One of the most significant accompanying hazards of loyalty programs is loyalty program liability.

While this liability can negatively impact your business’ bottom line, the good news is that there are concrete, actionable steps that your marketing, finance, and accounting departments can take in concert to reduce the potential consequences.

Throughout this article, we’ll discuss what causes loyalty program liability and share strategies to help mitigate it.

What is loyalty program liability?

Loyalty rewards program offer redeemable incentives designed to keep customers returning to your business. By multiplying the total number of rewards that get redeemed by the individual cost of each one, we arrive at an estimate of a company’s loyalty program liability.

Ensure accurate loyalty program liability estimates

Obtaining an accurate forecast of loyalty program liability hinges heavily upon the assumption that your company can hone in on its user redemption rates (URR). Without knowing the percentage of outstanding points that customers will redeem, it’s futile for companies to anticipate the cost of redeeming them.

In this respect, marketing departments are an invaluable resource. Using the information gleaned from customer engagement campaigns, they can unravel the constellations hidden within millions of data points, and provide the company with a palpable projection of future redemption rates. While separating the wheat from the chaff can seem like a massive challenge when it comes to interpreting this big data, new and more robust emerging technologies — such as advanced predictive modeling and potentially even artificial intelligence — can make this once-Herculean task manageable.

Anticipate future liabilities

The primary concern of financial departments will be to correctly anticipate future liabilities. In doing so, they’ll be able to correctly architect financial plans that defer appropriate quantities of revenue towards absorbing them.

It’s especially important that in their mission to drive down costs, financial departments do not inadvertently cause reductions in redemptions. After all, when these occur, they indicate customers have ceased to interact with the company.

Defer proper revenue

By taking into account granular-level data on individual behaviors, accounting departments can construct a financial model to defer the proper amount of revenue for the loyalty program. The ideal quantity is neither too much (leading to “stuck” revenue), nor too little that it leads to an income-depleting, restatement of liability.

The bottom line

Through the harnessing of advancements in big data, predictive analytics and machine learning algorithms, your company can unlock the secrets contained in a sea of customer data — and use these predictive insights to divert the correct amount of revenue towards mitigating liability. While loyalty program liability is inevitable, it’s not unconquerable, and with the right strategies, your company can maximize the benefits of loyalty programs while reducing their hazards.