Loyalty program strategy and liability management

A proliferation of customer loyalty programs in recent years is the result of companies' efforts to acquire and retain customers, increase customer spending, influence customer spending habits, and encourage the purchase of additional products. In fact, customer loyalty programs have become a basic consumer expectation and are part of the "core product" offered by many companies.

PwC's property & casualty actuarial team provides analytical and advisory support to clients in many industries, including hospitality, airline, retail, and banks and financial services. Our extensive experience with loyalty programs and our use of proven industry models, tools and other information enable us to help clients improve their liability management processes and understanding of customer behavior. In addition to improving the accuracy of financial reporting and profitability tracking of customer loyalty programs, we help our clients understand the impact of their decisions on their customers.

Common issues

  • Rapidly growing program membership with a direct impact on company revenues and expenses.
  • Increasingly significant customer loyalty program liabilities relative to the sponsor's balance sheet.
  • Greater scrutiny from internal (e.g., controller and CFO) and external (e.g., external auditors and regulators) stakeholders.
  • Progressively dynamic programs (e.g., expanding promotional programs and redemption options) impact customer behavior and ultimately model assumptions, increasing the volatility of modeled liabilities.
  • Greater volatility in modeled liabilities, primarily related to external events such as the recent economic recession.
  • Expansion and increased complexity of customer loyalty programs may render internal estimation models insufficiently robust.
  • Proposed upcoming changes in accounting rules related to the convergence of US GAAP and IFRS primarily affecting the treatment of deferred revenue and/or the use of a fair value approach.
  • Growing customer expectations for better and more diversified rewards.

How we can help

  • Improve the accuracy of financial reporting related to rewards programs by establishing accurate liability estimates.
  • Provide a second opinion on internal or external liability estimation models and make recommendations for improvements, as needed.
  • Provide a better understanding of the impact of program changes on your customers' behavior.
  • Support the identification of appropriate membership segmentation for better liability estimation.
  • Estimate, communicate and promote a full understanding of the financial impact of a change in accounting rules.
  • Profitability tracking of a company's customer loyalty reward program.
  • Support ongoing monitoring of a company's loyalty program through the use of an effective customer information database.

Our services

  • Design and implement advanced actuarial projection models focused on ultimate redemption rate estimates and overall liability estimates, including estimation of cost per point and point utilization across different award options.
  • Develop rewards program redesign liability estimation models, including sensitivity impact models and measuring the impact of program redesign.
  • Develop customer behavior analyses that allow a program to target more profitable members and increase overall program effectiveness, using advanced predictive models.
  • Provide support for management's compliance with changing accounting guidance (e.g. Topic 605 Revenue Recognition), including the design of fair value measurement models.
  • Develop key performance indicators and performance dashboards for management's ongoing tracking of loyalty program profitability and performance.