Issue #18: Marketing Built It. Finance Could Save It.

Years back, I worked on a brand where I asked a simple question: “Can I see the loyalty P&L?” It didn’t exist. There was no balance sheet tied to points. Members were earning redeeming points in droves. But the free product was funded by franchisees, so no one knew what the cost per point was. It was this never-ending fake points bank that lived in the sky, not in systems, where no one really knew what the program was costing.

The more I’ve talked to others in the industry, the more I’ve realized… this wasn’t an outlier.

A former colleague once told me about a major global hotel brand whose loyalty program nearly went bankrupt about 10 years ago🤯. Not because it wasn’t popular or growing, but because no one had really been properly managing the books behind it. Lots of points. Little discipline. And eventually, it catches up.

In my past role, I worked with brands around the world across sectors and was often met with blank stares when I asked specific questions around cost per point, breakage, and LTV. I knew these brands were teetering on disaster due to their lack of loyalty financial knowledge.

We’ve all read the headlines about how “rich” loyalty programs are (heck, I wrote about it in a past issue). But there is a major caveat to this… if your points are funded by a bank.

Co-brand credit cards fund the ecosystem and print money for airlines, hotels, and many retailers. But outside of that? Most brands aren’t sitting on a goldmine, but maybe a landmine in the form of liability.

Len Llaguno of KYROS helps brands understand the true cost of their programs, both now and in the future. In our conversation, he told me, “From an accounting perspective, loyalty liabilities are treated differently than other liabilities, so it can be confusing. We often see programs where it’s not calculated correctly or sometimes it’s not calculated at all.”

Our industry is growing at a rapid pace, so we have no problem launching programs, scaling them, and driving engagement. Why? The focus has been on hiring brilliant loyalty marketers, a very in-demand role. Plus, more marketing dollars have been (correctly) put behind the promoting and growing the programs.

But on the flip side, there is a dearth of in-house finance experts who truly understand the economics of loyalty programs. Brands that launch programs are not actively hiring loyalty financial experts to manage the books. Leaders are then putting this work on the backs of marketers, which is a very bad idea.

The team at KYROS has seen this happen. Len told me, “In one case, a highly regarded loyalty program had been calculating liability internally using a spreadsheet created by the marketing team. When we analyzed it… the numbers were completely wrong and had been accumulating errors for years.”

The result of these errors? Your best case scenario is the program having to make consumer-unfriendly changes to right-size the program. A few examples are expiration rule changes with little warning, devaluations and restrictions on the rewards chart, and stricter tier requirements to downgrade more members (and, in turn, give out fewer points).

Your worst case scenario? Your program getting killed, either quickly or slowly. Or being forced to “reimagine”.

🎯 Hire an internal loyalty finance expert.
Not someone who will do this side of desk. Not “they’ll help when needed.” Someone 100% focused on owning the program economics in partnership with loyalty marketing. Be besties 👯 . Brands I’ve worked at that had this had healthier programs in more ways than one.

👯 Don’t model the program alone.
There is a saying that only fools represent themselves in court. I’d argue only fools try to build out their own loyalty model and defend it to the CFO. You (and your new finance bestie) need to bring in outside reinforcements. To build. To check. To project. To audit. To run sensitivity analysis. The list goes on. Think you don’t have the money for that? It’s cheaper than your marketing budget—and much cheaper than your program going sideways.

⚖ Build a real loyalty P&L.
This sounds obvious, but as I said previously, not everyone does. And the keyword here is “real.” You need to know your cost per point, redemption cost, breakage, total liability, and the true LTV of your program for it to have a long-term fighting chance to stand up to scrutiny.

📏 Measure behavior, not just participation.
I’ve written often that we are too enamored with number of members and percent of sales from loyalty because we see loads of customer data coming into our systems. You can get data many ways. You need to be focused on proper measurement for incremental behavior, repeat behavior, longevity, and advocacy.

⚠ Beware too much success.
Programs that don’t gain traction aren’t successful, but they also don’t cause huge financial strain. However, a popular program signing up thousands, if not millions, of customers monthly is where brands get into trouble. Too much earning and too little redemption means sitting on a lot of liability. Model all the scenarios—good and bad.

This post is really a love letter to our finance partners. We need them. We need more of them. They are tremendously crucial to the success of your program.

For more on this topic, read my interview with Len below.

Do you feel your brand has the loyalty finance expertise internally it needs? What other tips do you have to ensure your program’s financials don’t go awry?

Len is a credentialed actuary and founder and managing partner at KYROS, the world’s only actuarial firm solely focused on loyalty programs. He leads a team of expert actuaries that help loyalty finance teams de-risk points liability and loyalty program leaders justify more investment in the program by quantifying the incremental value they create. They work with many of the world’s largest programs including KFC, Expedia, Avis, Virgin Atlantic, Wyndham, Fanatics, Bilt and more. Check out their website at www.kryos.com.

The interview has been edited and condensed for space.

#1 SMP: When people hear “actuary,” they tend to think insurance. Explain simply what you do for loyalty programs and what problems you solve.

Len: Most people actually say, “What the hell is that?”. Actuaries typically work in insurance, building mathematical models to predict things like how long people will live so insurers know how much to charge and how much money to set aside to pay claims on policies they’ve sold. Loyalty programs have a similar problem in that they need to set aside money as a liability to pay for the eventual redemptions on points or miles they’ve issues. But they don’t know exactly how many points will be redeemed or what the ultimate cost will be.

So companies need to estimate how much liability to put on their balance sheet to reflect the promises they’ve made to customers. Often, this is one of the largest liabilities on the balance sheet. Financial auditors like KPMG, Deloitte, or EY will ask where that number comes from and want to see the analysis behind it.

So about half of what we do is help companies determine the correct liability for their points programs and help auditors feel comfortable signing off on those numbers.

The other major area is working with program managers to quantity the incremental value their program creates and uncover the hidden levers to maximize it. It turns out this is deeply rooting in understanding the trade-off between Customer Lifetime Value (CLV) and liability. Understanding this trade-off gives us a unique data driven lens to help program managers tell better stories about the value they create, helping to unlock budget and investment in the program

#2 SMP: Where do brands typically mis-measure loyalty program performance? Do they over-focus on certain metrics?

Len: Most programs have KPIs that serve a purpose, but what’s often missing is the connection between those KPIs and enterprise value creation. Executives want to understand how changes in loyalty metrics translate into financial value. For example, how does a 100 basis point increase in engagement translate into incremental profit? Without that linkage, loyalty programs struggle to gain credibility at the executive level, or shift the conversation from loyalty as a cost center to loyalty as a value driver.

The long-term value of loyalty programs comes from improving retention over time. The financial impact compounds over years, not immediately. Many stakeholders expect short-term revenue lifts that aren’t realistic. If companies cannot tell a clear, data-driven story about value creation, the program will often be perceived as a cost center rather than a value driver, and it becomes very hard to get the investment needed for a program to reach its potential.

#3 SMP: What mistakes do you see brands making when setting earn and burn rates or determining the value of points?

Len: Many companies focus heavily on earn rates but don’t properly analyze how earned points translate into redemption value.

There are effectively two steps:

Some brands create complexity or “loyalty theater” by changing earn rates or redemption charts in ways that appear more generous but don’t materially improve value. Simplicity is often better. Customers shouldn’t need complex math to understand the value proposition.

Complex structures may create short-term excitement but can weaken long-term trust.

#4 SMP: How should brands think about expiration policies and breakage assumptions?

Len: Expiration is often used as a tool to reduce liability, but it’s not always necessary. A strong actuarial model can estimate how many points are likely to be redeemed, even without expiration rules. Points function as an incentive currency. When points expire, that incentive disappears.

Expiration can create a short-term behavioral nudge, but it often creates a negative customer experience. Positive reinforcement tends to be more effective than punitive expiration policies

#5 SMP: What is a myth about loyalty programs you’d like to retire?

Len: The idea that redemption is bad. Redemption is proof the program is working. The most important outcome of a loyalty programs is that it increases Customer Lifetime Value. When CLV increases, the business will make more profit in the future—something all CEO’s want.

We see time and time again that the acme of redemption is a key inflection point in the customer journey where CLV increases. The more people redeeming means more profit in the future. The challenge that programs have is telling a credible and compelling data driven story that is a true fact.

If you can’t do this, then the org often views redemption negatively because it represents a cost. But when structured properly, redemption is an unlock for business growth.

SMP Bonus Question: Personally, my favorite loyalty program is….

Len: I’m very loyal to United. I get significant value from benefits like priority boarding, free checked bags, and lounge access, especially when traveling with my family. The United app is also very strong from a personalization perspective. It provides detailed travel updates and makes the experience smoother.