Financial Models for Rewards Points
Before starting your rewards and loyalty programme it is important to complete financial analysis to understand the income statement, balance sheet, and cash flow implications of your loyalty initiative. In this post, we will share some of the best practices
and structural elements of how loyalty and rewards point programme models the economics of their marketing strategy.
How it works!
Data collection and transformation
It is important to have a good data collection process about customers and identification of certain traits and psychometrics and demographics of the customer. Establish a baseline of known customer behavior, perform a sanity check on data and transform the data to extract essential features that help to build the model.
Perform segmentation analyses on your customers. You should first build behavioral segments. If relevant, combine this with demographic segmentation.
Data inputs and assumptions translate to a model design
Inputs and assumptions provide an important link between the client data and all calculations within the financial model. They are the means by which you can play around with changes in customer behavior, program effectiveness, and member engagement.
Additionally, customer assumptions require an understanding of the type of behavior change assumed for a subset of members. Will your program deliver increased share of wallet or higher retention, maybe higher advocacy and augmented spend frequency? Before you model, have a hypothesis and build your assumptions.
The inputs and assumptions will vary greatly from program to program and need to be adjusted depending on the structure, generosity, customer base, and type of program. They are uniquely developed for a program and typically revolve around enrollment rates, attrition, and point redemption.
Model building and testing phase
Model design depends on the amount of data available, the financial outputs required, the complexity of program design, and the resources and analytical tools available.
Common model design components are Client Data, Inputs, and Assumptions, Enrollment, Revenue, Points Earned/Used, Program Costs, Fiscal Calendar Summary, Sensitivity Analysis, and Summary Graphs.
Programs with an unpublished structure may be simpler from a liability standpoint, but the “scoring” of members necessitates additional tracking.
Once created, a model needs to be tested before it is used for the analysis. As you build formulas and connections, test simple logical constructs on the model to ensure that it can be trusted. For example, if you expect an increase in point earning through
engagement activities to 100% of all points earned, what will happen to reward costs?
Use model output
There are four areas where we typically like to do an in-depth analysis: enrollment, revenue, cost, and profitability. Use customer segmentation from customs data to isolate the effects that different customer segments have on those four main summary metrics.
Track the number of new members especially by channel or acquisition source and the impact of attrition over time.
For a points-based program, you need to breakdown the number of points earned and points used by month. For programs that include tiers and benefits, it is important to show the attainment of these tiers and the likely claim rates. This will provide an understanding of how long it takes to attain a tier (including the number of people invited based on historical spend).
Account for both member and non-member spend and show the baseline of total spend if there was no program. As the program ages, total revenue with the program should grow with an ever increasing chasm between forecasted total revenue with a program and that of the counterfactual where no program exists
Establish the profitability of the program and other financial metrics pertaining to cash flow and income statement considerations. This will help you understand if the program design you have created will deliver the results and ROI that you expect.
No matter how you choose to do it, the most important thing to remember when promoting your rewards program on social media is to cater your content to the platform you’re sharing on. If you’re sharing the right message in the wrong place, the value of your program won't be understood.
We are Just Getting Started
We are at the crossroads of mass AI adoption and our customers continue to adapt to the digital user experience. From customer service to campaign management, the growth of data-driven insights will drive businesses and user engagement. At Quantamix Solutions, we are committed to bringing state-of-the-art applications and dynamic data-driven contents. We are going to continue to support your work by creating tools that are easy to use and help you to deliver the most effective, engaged and tailored user experiences. Keep an eye out for an announcement of our new solutions in our blog posts.
Get in touch with Quantamix team
The Quantamix team is happy to discuss and customize the solution for your needs. If you would like to collaborate on our solution, we are looking forward to your inquiries.
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