Loyalty trends & best practices

Managing a Multi-brand Loyalty Program: How to account for points usage behavior between brands

by Arif Damji
November 06, 2015
Managing a Multi-brand Loyalty Program: How to account for points usage behavior between brands

In the retail vertical, we see an increasing number of brands that are launching multi-brand loyalty currencies. This has been widespread in the travel vertical with the franchise model for hotels, but the growth of such programs in retail begs the question of how to best account for the differential in earn and redeem behaviour. Simply put, you cannot expect that a member’s earn behaviour will proportionally map to their claims with each brand, and instead, there is likely to be an increased claim rate with brands that have a wider set of rewards or more generous rewards. If left unaccounted for, this can lead to an unfair detrimental impact of the program upon the income statement of one or more brands.

Optimize for beneficial cross brand redemption

Cross brand redemption is defined as where points that are earned with one brand are used with another. An example of this can be seen easily in retail with our client 1-800-Flowers, which runs Celebration Rewards for its brands that include 1-800 Baskets, Fruit Bouquets, Cheryl’s, Fannie May, The Popcorn Factory, Wolferman’s, and Harry & David. The potential benefit is that it encourages its members of any of those brands to explore the other brands, and also encourages higher cross-brand spend. In this example, the end goal is to expand out the total Share of Wallet opportunity across all brands.

Now such an arrangement between brands requires that the value per point on redemption items is equal to limit an arbitrage opportunity. In our early example, if the value per point of Celebration Rewards is $0.02 for 1-800-Flowers and The Popcorn Factory rewards is $0.01, members would only use points at 1-800-Flowers rewards as they can maximize the value of their points. 1-800-Flowers solved this problem through the use of discount vouchers that are usable across brands. That being said, that approach doesn’t work for all programs.

Establish whether you need a central issuing entity or inter-brand transfers

There are two approaches towards ensuring the correct allocation of costs of points to each brand. From an accounting perspective, there is a deferred revenue and marketing cost allocation to each point awarded, however, for simplicity, let’s think about transfers happening at the end of each year.

The first approach is to have a central issuing entity to control all points earned and redeemed. It works well for franchise models in the travel sector, or where a master brand controls many sub-brands to allow them to provide points to their end customers. As with the diagram below, the central issuing entity sets the price of each point that is awarded or redeemed (sometimes with a spread). The sub-brand then pays for each point that it awards and is paid for points that are redeemed with them.

Exhibit 1: Example of a system with a central issuing entity

The second approach is to have direct transfers between brands in the same loyalty program, normally made at the time of redemption. Here, the model works well when there is no central brand and sub-brands, but instead a collection of unrelated brands in a portfolio. The brands will look at the differential of points redeemed to earned for each brand and accordingly make an adjustment payment and a liability transfer at the weighted average value per point.

Exhibit 2: Example of inter-brand transfer system

 Predict ahead of time the impact and expected cross-brand redemption

Now, creating a system of accounting for points usage between brands is the first step, however, it should be part of a larger initiative to predict the behavior of each member and also the macro trends of member earn and redemptions across each brand. This will help to ensure financial implications of the wider multi-brand loyalty program are predicted and that it has been established that the program is going to drive cross-brand redemptions, and hence cross-brand spend. As part of our loyalty consulting engagements, we help brands understand the potential cross-brand redemptions and account for it in our overall financial model. For more information, reach out to us here.

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