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Loyalty Programs

Delivered October 21, 2019. Contributor: Megan B.

Goals

To understand how loyalty programs are structured financially.

Early Findings

  •  The Wise Marketer states a company must decide if a loyalty program will be funded from the marketing department budget or if it will function as a standalone unit. A company must also determine if the program can be funded at the expense of partners or suppliers.
  • The cost of rewards is usually set as a percentage of program revenue.
  • At the first stage, non-financial indicators are usually used to measure program success. As the program matures, then financial targets can be monitored.
  • The book by Mr. Hoffman from 2013 is outside of our scope to fully read and analyze, but a brief read through some of the relevant sections discovered that the paper does not really cover standalone versus integrated business units within a company, but rather it compares loyalty programs that are standalone versus shared or consortium across multiple companies/entities. The closest it gets to discussing this topic is that coalition loyalty schemes are usually run by a separate third party, whereas shared schemes are run by the dominant company.
  • The annual report for Nintendo records no separate unit or budget for My Nintendo Rewards. The scheme is not even mentioned in their annual report. Under the SGA expenditure, we assume that loyalty program spending is under "advertising expenses", which totaled $685 million last year. There is no record or mention of marketing, advertising or loyalty schemes contributing to Nintendo's income.
  • We also looked at other related rewards programs, such as Best Buy and Game Stop. While programs from Microsoft (Xbox) and Sony (Playstation) would be useful, these companies are so large and operate in so many verticals, their annual reports did not contain any valuable insight on just video game divisions.
  •  Best Buy's report is slightly more helpful. The cost of the loyalty program is built into the company's "accrued liability" tally. They estimate the percentage of rewards they project will be redeemed based on historical data. Accrued liabilities for Best Buy in 2018 amounted to $982 million. However, this category does encompass other elements.
  •  GameStop's annual report describes its PowerUp loyalty program. This company uses the program as a revenue source, rather than an expense: "the portion allocated to loyalty points is initially recorded as deferred revenue and subsequently recognized as revenue upon redemption or expiration."

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