Loyalty Program Liabilities: Definitions & Recommendations

When you launch a points-based loyalty program, you’re creating a micro-economy with its own currency, market dynamics, and—most importantly from a legal standpoint—liabilities. Because these points can have monetary value that’s realized at the time of redemption, companies must defer revenue to cover these costs. Let’s review key terms and definitions from the Financial Accounting Standards Board’s lengthy guidance on loyalty program accounting.

Points issued

This is the number of loyalty points your loyal program has issued or awarded its members. The currency of your loyalty program—points—can be issued after a member completes a purchase, takes a survey or poll, or meets another condition. Then those points can be exchanged for select goods and services made available through your program.

At the individual level, members may have any number of points on hand at a given time, but issued points are the total number distributed to all members in a given period.

At the program level, the number of points issued depends on how a program is structured and how active its members are. Some of our Oracle CrowdTwist customers issue more than 20 billion points in a year!

Points burned

This is the number of loyal points that have been removed or burned, from your loyalty program balance sheets. The three primary methods of point burn are:

1. Redemption: Points may be redeemed in exchange for a range of rewards, including discounts, free products, sweepstakes entries, and much more.
2. Expiration: Companies may establish predefined terms for points expiration to encourage members to stay active and control their liabilities.
3. Other: Additional common causes of burn include the removal of points due to a product return or the deactivation of a member’s account.

Outstanding points

This is the number of loyalty points that have not been redeemed, expired, or otherwise burned. In other words, these points still represent a liability to your company. This is calculated using the following formula:

Outstanding Points = Points Issued - Points Burned

Redemption rate

This is the percentage of loyalty points issued to program members that are redeemed. It’s calculated using the following formula:

Redemption Rate = Points Redeemed / Points Issued

For most programs, redemption rate is an indicator of program health because members only redeem points if they find your program valuable. If you’re operating a well-designed loyalty program, you want more redemptions because members who redeem are likely to spend and engage more than those who haven’t.

However, the rate at which members are redeeming may directly impact your loyalty budget. Work with your finance and accounting team to determine the appropriate redemption rate to use in your liability calculations.

Cost per point

This is the monetary value of each point based on the goods and services available for redemption in your program. It is calculated using the following formula:

Cost Per Point (CPP) = Cost of Redemptions / Points Redeemed

Your CPP will change as your loyalty program grows. Indeed, it will change every time you update your rewards catalog and overtime as member behavior changes. In total, your cost of redemptions is impacted by a variety of factors, including:

• The cost to provide each of the rewards available
• The number of loyalty points needed to obtain each reward
• The popularity of each reward in terms of redemption frequency
• Any limits placed on redeeming points for certain awards, in terms of how frequently a reward can be obtained or a cap on the total number of times a reward can be obtained (such as a limited-quantity reward)

Keep in mind that the cost of a reward and the desirability or perceived value to a loyalty program member are often not the same thing. This is particularly true of rewards that aren’t generally available for purchase, such as limited-edition items, signed items, and special events or access. Consider taking advantage of such rewards to help control costs while also giving your loyalty program members access to something special.

Work with your finance and accounting team to determine the best CPP to use in your liability calculations.

Loyalty program liability

This is the total amount your company should reserve to pay for future reward points as defined by US generally accepted accounting principles (GAAP), specifically Accounting Standards Codification (ASC) Topic 606. This is calculated using the following formula:

Loyalty Program Liability = Outstanding Points * Cost Per Point * Redemption Rate

While it’s important to carefully track your loyalty program costs and liabilities from a compliance standpoint, it’s misguided and shortsighted to view your loyalty program through a cost lens. That’s because, in truth, your loyalty program is…

An investment in better customers

A well-crafted loyalty program generates a strong return on investment by creating compelling experiences that keep bringing customers back. Loyalty leaders grow revenues roughly 2.5x as fast as other companies in their industries, according to Harvard Business Review research. So, while you’re keeping an eye on your loyalty program liabilities, don’t lose sight of all the payoffs that come from running one.

Learn more about how Oracle CrowdTwist can enable your loyalty program.

Need help launching or optimizing your loyalty program? Oracle Marketing Consulting has more than 500 of the leading marketing minds ready to help you to achieve more with Oracle CrowdTwist. Talk to your Oracle account manager, visit us online, or reach out to us at CXMconsulting_ww@Oracle.com.

The information in this post is for general guidance on estimating program performance and costs, and should not be considered legal, accounting, tax, or other financial advice. As such, it should not be used as a substitute for consultation with your professional accounting, tax, legal, or other competent financial advisers.