Chapter 7 – Promotional Currency Model Explored

Points.  Miles.  Whatever.

The promotional currency model of loyalty has its own unique set of considerations.  Don’t underestimate the complexity of this.  I don’t mean to scare you away.  A promotional currency program can be a very effective way to keep customers.  It can also become a powerful platform for launching other promotional marketing activities.  But like all great things, it comes at a price.  The price is measured in money, effort and commitment.

The first consideration is this.  How will a member be identified?

Membership Cards And Tags

Will you issue membership cards?  Key chain tags (quite popular these days)?  Do you already link customers with transactions?  This is an important question and along with it go the questions of logistics.

If customers are going to get a card or tag, how do they get it?  Temporary cards are sometimes attached to membership applications and customers are able to enroll and participate instantly.  In the temporary membership card situation, you wait until the member has had a couple of transactions, then you mail a permanent card and/or tag.  In other programs, permanent identification materials are issued on the spot, also allowing customers to enroll and participate instantly.

There are cost trade-offs with the two methods I’ve outlined above.  With temporary cards followed by permanent cards in the mail, you have the mailing cost.  With permanent cards issued on the spot you ultimately waste more expensive materials.

There are certainly other ways.  Just about every program should have an on-line enrollment function.  You can issue a member number and even allow members to print their own temporary card (complete with bar code) instantly.

Name Your Promotional Currency

The currency might be referred to as “points” or “miles.”  I’ve seen other terms used as well.  On several occasions, I’ve seen the term “credits.”  And for a golf course, I saw the term “yards.” Some companies try communicating their currency in percentages of spending, hoping to avoid naming the currency -“You’ll earn 1% on all purchases, but on Tuesdays you’ll earn a 50% bonus or 1.5%.”  This can get confusing, especially when you try to introduce a bonus -  “You’ll earn 1% plus you’ll get an extra $5.00 credit on Fridays.”

For the sake of clarity it’s important to name your currency.

Select an Appropriate Unit of Measure

The unit of measure should not be too large nor too small.  As a rule of thumb, a promotional currency should be worth $.01 on the redemption side of the equation.  That’s large enough so that members aren’t throwing around tens- or hundreds-of-thousands of points for $25 in value.  But it’s also small enough that you can work out bonuses or partnership deals that don’t require splitting points into fractions. Let me illustrate:

Suppose you’ve decided that a five percent funding rate is appropriate for your situation.  You announce that members will earn one point for every dollar spent and that each point is worth five cents (for a real example of this precise funding model, see the Waldenbooks Preferred Reader program).  Next you make a deal with a partner company.  The partner company can’t afford five percent, but they can afford two percent.  It’s still a good deal that adds value to your relationship with your customers. Since the partner will pay you for the currency, you make a deal.  Now you’ll have to tell your members they’ll earn 40% of one point for every dollar spent or one point for every $2.50 spent with your partner.  If the currency is worth one cent, you can tell members they’ll earn five points for every dollar spent with you and two points for every dollar spent with your partner.

Require Redemption in Fixed Units

Requiring members to redeem points in denominations that you define will virtually guarantee that they will always have a balance remaining after redeeming. Therefore, they will be reluctant to defect because they will always have something to lose.  Having this structure will ensure that all of your promotional currency can never be redeemed.

Here’s an example.  Let’s use the Waldenbooks Preferred Reader program as the example.  Members earn one point for every dollar spent (in addition to their ten percent instant discount).  Once a member has accumulated 100 points, a five-dollar reward is issued.  Let’s say I had 80 points and just made a purchase for $35.  Now I have 115 points.  They deduct 100 points, send me a five-dollar reward, but I still have 15 points in the bank.  I’m on my way to my next reward and if I don’t go back to Waldenbooks and give them more business, I’m leaving value on the table.  That’s an economic cost of defection – making customers think twice about leaving.

Using Redemption to Drive Sales

Most promotional currency programs have several options on the redemption side.  A few years back, many companies – regardless of industry – offered a catalog of merchandise and some travel-related options for redemption.  These basic offerings evolved from the incentive and motivation business.  Over time, most marketers (especially on the consumer side) found these redemption options too expensive to offer for their customer marketing programs.  Today, most programs like this offer a redemption option for the marketer’s own product (for instance, most retailers with promotional currency programs offer redemption in the form of gift certificates).

Ultimately, redemption should be used to drive incremental sales.  After all, the primary objective of loyalty marketing is to improve retention and increase share of customer.  Those objectives are measured in terms of larger average sales per customer.  Sometimes, a gift certificate may displace a paid sale because the customer would have shopped anyway.  But with careful analysis regarding a customer’s average time between purchases, you can set an expiration date on a redemption gift certificate to help ensure that the sales are incremental.

For instance, if your research shows that the average time between visits to the store is 60 days, set the expiration date for 30 days and automatically trigger the award.  When a customer shops and clears the necessary plateau, generate the award and mail it (or e-mail it) to the customer.  Since the customer just shopped, the 30-day expiration date will ensure that if the certificate is used before the expiration, the sale can be considered incremental.

Here’s an example of a program that probably could have been more aggressive about their expiration dates.  The McDonald’s Road2Rewards program issued rewards with an expiration date about 75 days after the redemption cutoff date (because this was a short test program, all rewards appear to have had the same expiration date).  Any member who earned a reward is probably coming in at least one a month.  With a 75 day expiration period, the reward (if it’s a reward for McDonald’s food) is unlikely to generate incremental activity.  It will just cannibalize an otherwise paid transaction.  However, if McDonald’s made the expiration period shorter – say 21 days after the estimated “in home” date – they’d have a better chance of generating incremental business. 

Some say this approach is manipulative.  But if you do not build mechanisms into your loyalty program to ensure that you improve your business, you’ll merely reward existing business and drive up your cost structure.

The Program Accounting System

This is no small task.  Don’t mistake your marketing database or your data warehouse for a program accounting system.  This is a different animal.  There are companies who sell software packages or packaged services to support the program accounting system for loyalty programs.  Some companies decide they’ll do it themselves with internal development resources.  Often this is a company culture consideration.  I’ve been in companies that always decide to build something rather than buy it.  Some companies are just “do it yourself” companies.  So be it.  If you’re one of those companies, just make sure the information technology team you’re working with has the right level of passion to do this.

Basic Program Accounting System Information

The major information components are members and transactions.  When a customer enrolls and becomes a member, you create a member record.  As a member transacts with your program, you post transactions to the member’s account.

What I’ve described below is the information you’ll need for a basic program accounting system.  This is simplified to some degree and I’m sure many readers can suggest other things that are necessary for certain situations.  Every company’s needs vary.  But what I’ve laid out probably addresses the information required to manage 90% of the situations you’ll face.

Members

Some key elements you’ll need to include in a member record:

·        Member number.  Some identification number you’ll use to link a member’s information together.  If you’re already tracking customer information you’ll have some identification number (probably called a customer number).  If you don’t and all this customer data is new to you, you’ll need to establish a number scheme.  No big deal, but it’s just something you’ll need to do.

·        Name, address, city, state, zip code, phone number, e-mail address.  The basic mailing and communication information.  If it’s a business-to-business program, you’ll need a company name and title for the contact person who is the member.

·        Enrollment date.  You’ll want to keep track of when the customer became a member.  This is a useful piece of information to have, especially if you want to recognize tenure within the program.

·        Enrollment method.  An indication of how the customer became a member.  On-line enrollment.  Off-line enrollment.  You’ll have your own definitions based on the kind of business you’re in and the nature of your program.

·        Preferred communication method.  Does the member prefer to receive communication in the mail, via e-mail, or not at all?

·        Member status.  You’ll probably want to define some status codes to assign to members.  Some of the most basic ones are “Active” and “Inactive” to reflect how long it’s been since the member has had activity.  There are no universal definitions for active and inactive, but you’ll probably find it useful to define something for your business even if you need to change it later on.  You may also have a status for things like “Undeliverable” for those who don’t have a mailable address and “No Contact” for those who don’t want to receive mail or e-mail.

·        Current balance.  The current balance in the member’s promotional currency account.

These are the fundamentals for a member record.  There are other summary statistics you’ll want to carry for members, but they typically exist in something that might be called a “Member Summary” record.  The member record is the contact information that allows us to understand a member’s basic status and contact information.

Transactions

Transactions include member purchases and redemption transactions.  This is a running tally of the transactions that affect the member’s promotional currency balance.  Purchases add to the member’s balance.  Redemption transactions reduce the member’s balance. 

Below I’ve identified some key elements you’ll need in transactions.  This is a little more difficult than describing member information because this tends to get even more specific based on the type of business you’re in.  If your business has multiple line items on each transaction you may have a transaction number that ties various records together.  Transactions have a header record and accompanying detail records that collectively describe the transaction.  That’s a slightly more complex situation than the one I’ve outlined below, but once you have a sense of how this works it’s not a tremendous leap to get to that level.

·        Member number.  This will link the transaction back to the member.

·        Date/time of transaction.

·        Type of transaction.  This may vary based on your business.  Some universal types may be “Purchase” and “Redemption.”  Some other types you may find necessary include “Return” (if you’re in the kind of business that has returns that create customer credits) and “Adjustment” (there are always things that need to be adjusted).

·        Location.  Depending on your business.  In retailing this might be a store number.  In the hotel business it might be a hotel number.  If you’re in a multi-channel business (off-line, on-line, catalog) the location code might indicate the channel through which the transaction occurred.

·        Amount of transaction.  This is simplified.  Depending upon your business, you may have sales tax, delivery charges and other amount categories that you’ll carry in this record.  The important thing is this: keep the amount fields at all times.  There is also a “Base Currency Earned” field and I’ve seen people drop the original dollar amount and just carry the calculated currency.  If you have to trace a transaction back to its roots to investigate potential errors it becomes very difficult if you don’t have the original amount fields.

·        Base currency earned.  Based on the rules of your program, how much the member earned for this transaction.

·        Bonus currency earned.  This is populated based on any bonuses in effect at the time the transaction occurred.  You may also have a bonus code that explains why the bonus occurred.  For instance, if you’re a restaurant chain and you’re offering a 50% bonus on transactions that occur between 2:00 PM and 4:00 PM there might be a unique code to describe that.  Let’s say you make the same bonus 100% on Tuesdays because they’re particularly slow.  That might be a different code.

That is the most basic information required to track transactions.

Member Summary

A member summary record is one that holds cumulative buckets of information that allow you to have a snapshot of your relationship with each member.  I will suggest some categories for the buckets, but often the same buckets occur over and over again for different time periods.  For instance you might have a “Total Transactions” bucket for each of the last 12 months (or 13 periods if you’re a 13 period company).

Some ideas for member summary information:

·        Member number.

·        Date & amount of most recent transaction.  This information (and the next two suggestions) allows a quick look at recency of activity and size of recent transactions.

·        Date & amount of second most recent transaction.

·        Date & amount of third most recent transaction.

·        Average transaction amount over the past year.

·        Average days between transactions over the past year.

·        Total transactions (12 buckets, current month and prior 11).

·        Total spending (12 buckets, current month and prior 11).

·        Currency earned (12 buckets, current month and prior 11).

·        Currency redeemed (12 buckets, current month and prior 11).

The member summary is a handy snapshot of member behavior.  It’s used as a decision support tool and a selection tool for targeted marketing activities.  Even if you find you need new summary statistics over time, no problem.  Change the way you summarize and redefine the variables.  This is created from member transactions, so you can summarize it any way you like.

There are other potential summaries you may find useful.  I’ve seen member/location summaries in the retail and hotel business, providing a snapshot of the relationship between a member and a location.  If it’s in the transaction records, you can use it to create useful summaries.  These summaries help facilitate your understanding of customer dynamics and your execution of targeted and measurable marketing activities.

Basic Program Accounting System Functionality

We’ve reviewed basic information requirements, now let’s take a look at basic functional requirements.

Enrollment

You’ll need to have the functionality to set up a new member.  This may happen several ways.  You might have enrollment forms that are filled out by customers and shipped off someplace for data entry.  The enrollment process might be integrated at point of sale – customers join, the name and address entry happens right then.  You may also have on-line enrollment.  Customers go to your website, input their information and become members.  You might have an opt-in process.  You mail an invitation to customers and they phone your call center or visit your website to tell you “Yes.”  In this case, you already have an electronic record with their contact information and you’re probably just going to ask them for a member number to activate their account (and perhaps ask them for an e-mail address).

Inquiry

You’ll need functionality to look up a member’s account, check transaction activity and the current balance.  Depending on your program, you may have a call center (or a special group within an existing call center) to handle program related customer inquiries.  Those agents may use this functionality to answer questions and solve problems. 

The majority of the inquiries revolve around, “What’s my balance?”  Build into the system a web-deployed look up function so customers can register and check their balance online.  Consider an interactive voice response feature to allow members to check their balance over the phone (but without a live agent).

Redemption

There are two forms of redemption: automatic and voluntary.  With automatic redemption, a reward of some type (a certificate – paper or electronic) is generated and delivered to the member when the balance hits a certain level.  With voluntary redemption, a member’s balance continues to grow until the member contacts the program to redeem.

With automatic redemption, the process fairly straightforward.  You run a process every day, week or whatever.  The process picks members who are above the redemption threshold, creates a reward for them, and creates a redemption transaction, thus reducing the member’s balance.

With voluntary redemption, it may be a process that the member initiates over the web, in person, over the phone, via fax or through the mail.  The transaction process is much like I’ve described for automatic redemption.

Adjustments

Remember when I described an “Adjustment” transaction type?  Well this is where it’s used.  Agents need to fix things and that’s how they do it.

When a member calls up and says they’re missing a transaction or they didn’t get the right amount of currency, no problem.  Fix it.  Don’t haggle or go into excessive probing.  Believe them and fix it.  You’ll occasionally find people who are cheating the system.  Build in controls so you can catch any member who calls more than two or three times with the same story.  Spend your time looking into the exceptions, not the norms.

Combining Accounts

When you define your program, develop a policy to address this.  Most programs at some point need the functionality to take all of the transactions from two different accounts and make them one.

That’s a look at the basic functionality you’ll need.  Start with this framework and customize it to suit your company’s needs.  Or look at some of the standardized solutions available in the marketplace.  Whatever you do, don’t underestimate the task.

Accounting

A few final considerations.  There are accounting implications when you’re looking at a promotional currency program.  I’m going to walk you through the basic accounting transactions that are used to keep the books.

When members transact with your program, you set aside (or reserve) part of the revenue to account for future redemption.  If you have a five percent funded program, you theoretically set aside five percent.  I say theoretically because that’s the worst-case scenario.  When we get into the measurement chapter we’ll have some fun with math and explore the conversion of a gross funding rate into a net funding rate.

Here’s a look at the basic debit and credit entries.  These entries occur in addition to the accounting transactions that you currently record to recognize revenue.

There are two new general ledger accounts I’ll describe.  One is “Program Funding Expense.” It represents the amount you’re setting aside on each transaction to pay for future redemption.  This is either an expense account or a contra-revenue account.  It either increases expenses or reduces revenues. The bottom line impact is the same, but depending on how your CFO and/or auditors choose to record it, it may have different affects on ratios.

The second new account is “Reserve for Program Redemption.”  This is the liability you’ve probably heard about.  It appears on your balance sheet and it represents the total amount you owe customers.  It’s a close cousin to the “Accounts Payable” line on your balance sheet.  Accounts Payable represents the amount you owe suppliers.  Reserve for Program Redemption represents the amount you owe customers.  

When a customer buys something:

            Debit              Program Funding Expense

                        Credit             Reserve for Program Redemption

When a customer redeems something:

            Debit              Reserve for Program Redemption

                        Credit             Cash (or some other account)

This second one is somewhat simplistic but it gets at the essence.  Some of it is a function of how you currently account for sales.  I’ve laid out this basic accounting information so you can facilitate a discussion with your accounting and finance leaders to see how you’ll handle this component of a loyalty program.

Now that we’ve taken a thorough look at the promotional currency model, let’s review segmentation and contact strategy.