IFRS15. Painful to say and harder on loyalty programs. How the REM helps.
My previous blogs have already talked about the size of the loyalty market and issues with it. So no need to repeat any of that in this article. I thought today I’d write about something that’s possibly a little dull but hey, it’s important. I don’t see a lot of people discussing how everything changed for loyalty programs since January of this year. SO here goes…
What’s IFRS 15? It’s the International Financial Reporting Standard “Revenue from Contracts with Customers”. This standard dictates how anyone who sells something with a promise of future rewards as a result of that sale, must account for it.
Accounting isn’t anyone’s favourite task as far as I can tell, but a lot of people are really good at it. And the IFRS crowd is made up of globally respected peers that are followed. Basically if you sell something for $1.00 and it has a future reward that is worth 2c attached to it, from now on you can only recognize 98c as revenue. The other 2c is deferred and sits on the balance sheet.
So what’s the problem? Well, a lot actually. Imagine the company above only makes four cents in the dollar — that’s not unusual. Well by not being able to recognize the 2c means it has to account for all its usual expenses but with 2c less revenue it will now appear to have halved its profit. Not only that, liabilities continue to grow when points are not redeemed.
For instance, at the end of 2015, these liabilities amounted to approximately $3.9 billion US for Delta Airlines and $2.6 billion US for Marriott International, or 10% and 25% of their respective total liabilities (Delta Airlines 2015, Marriott 2015). Consequently, decisions impacting loyalty points carry a dramatic impact on firms’ earnings and profitability.
As a result, a number of companies have changed the structure of their loyalty programs. For example, in 2008, Alaska Airlines decided to shorten its points’ expiration time horizon from three years to two. This change reduced the total value of its points and the associated deferred revenue. It also enabled the airline to claim an additional $42.3 million US in revenue. As clever as this approach may be, this financial engineering comes with a cost to customer satisfaction. And a lot of debate between the CFO and the CMO as you can imagine.
Is the standard fair? You bet. People are enticed to buy because of rewards, so its actually unfair for companies to report ALL the revenue and not the liability attached to it further down the track. Yep, its fair. But how do we make the CMO and CFO friends again? Or more importantly, how do we present a solution to this that is a win for customers?
The ideal solution would minimize liability by eliminating, or significantly reducing, the deferred revenue. For instance, an increase in redemption would help issuers achieve this goal, while improving customer satisfaction. The target, according to Accenture is a 95% redemption rate, which most companies find difficult to meet (Accenture Strategy, see beyond the Loyalty illusion: it’s Time you invest more wisely, 2017).
What stops 95% being achieved is mainly two groups. I call them the SAVERS and the CLINGERS. Savers are loyal and they keep growing their points, perhaps saving for retirement. They dream of endless holidays redeeming points in a company that they hope is still kicking when they are! No problem with this group. They are active and loyal. But programs are full of CLINGERS. People who have points that they value but aren’t useful enough to use and they maintain minimal activity each year so their reward points don’t expire. They can’t use the points, they can’t move them because they won’t transfer across programs and they can’t cash out because most loyalty programs struggle to offer more than 20c on the dollar, usually in the form of gift cards that force spending. I am a CLINGER in so many programs! This group is a problem for the loyalty company as well because the liabilities wont move. Basically no one is happy.
REM Loyalty is designed to be interoperable and work between loyalty programs. Not all of them. Just significant ones in each country or area that we think adds to the ecosystem of choices. We offer the ability to move those points with compelling offers that allow CLINGERS to combine their points and use them in programs immediately, or cash out. We run analytics over loyalty programs and identify the segments that need to be targeted. We call this our rescue mission. We love to rescue rewards. By allowing these clients opportunities to transfer their points we offer the loyalty program the opportunity to please their clients, add immediate revenue and boost their profits instantly. We believe that this will achieve redemption levels of 98% in major programs.
Liquidity and interoperability are key to our rescue mission and that’s what the REM is all about. Like the blog? Disagree? Let me know at email@example.com or join the conversation at https://t.me/REMLoyaltyEN