Why Financial Modeling Keeps Profitable Customers Coming Back

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Once merely the darling of supermarkets and airlines, loyalty programs are omnipresent in almost every vertical. But as consumer expectations have matured, the loyalty initiatives they receive are oftentimes stuck in adolescence.

True loyalty is about more than undercutting your competitor or a raft of points that will likely never be redeemed. Your customers expect comprehensive loyalty programs that go beyond generic points-win-prizes and discounts, and engender “real loyalty” rather than “deal loyalty.”

Brands can achieve this through an innovative concept called “Financial Modeling” — which, delivered equitably with the right strategy and complemented by the right technology partners, can engage customers, increase sales, lower costs, and acquire new customers at little or no cost.

We sat down with Jay Weinberg, Co-Founder and Partner at Ascendant Loyalty Marketing to discuss how financial modeling can empower brand marketers to laser-focus on loyalty and strategically pinpoint unique opportunities to customize a loyalty solution that precisely meets you and your customer’s exact needs.

The state of play in brand loyalty programs

A lot of brands think they need a points-based rewards program because all too many conflate the term loyalty program with a rewards program. You need to take a look at the data to determine the current state of customer loyalty, of customer retention, of lifetime value of acquisition. Then factor in issues, the landscape of your industry and your competition. This is where financial modeling comes into play, to look at where you are now and maybe predict what makes the most sense for your program in the future

And it culminates in a comprehensive strategic plan that builds the business case for loyalty marketing, whatever that case may be. It may be none. It may be something completely surprising or different than what the brand may have expected, or it may be very closely aligned.

Main use cases of a financial model

There are really three main use cases for doing financial modeling: One is to assess your current situation. The second is the business case for a loyalty marketing program. And Thirdly is to benchmark program performance.

1. Assessing your current situation

This allows you to pinpoint any issues and where they lie within your program. It allows you to understand the dynamics between the benefits you’re providing, the costs of the program, how your customers are behaving from transactional/non-transactional standpoints.

2. Making the business case for a loyalty marketing program

This is going to show the potential value of a loyalty program, whether it’s new or revamped that you can have on the top and bottom line. It can predict how much incremental spending is going to be needed by your customers to break even or hit a certain ROI.

3. Benchmarking program performance

Here we measure the actual results to ensure that the targets are being met. How many people have signed up or enrolled in the program? What kind of average dollar sale, how many visits or trips are you seeing both on a per-member basis and an overall basis?

Critical elements of financial modeling

There are four critical elements of financial modeling: One is your established parameters. The second is variable and surprise parameters. The third is your estimated costs. And last, but certainly, not least is the output. Let’s take a deep dive into each one.

1. Established parameters

Established parameters are basic facts that you include in the program or in the model, such as things like the number of stores, or the number of properties that you have that’s fixed or expected to expand over the number of years. Anything in the past that you can use as a benchmark – so understanding your past lifetime value, your past number of purchases within a year, your past average dollar sale. These are what we call established parameters that you can use in the model.

2. Variable parameters

The variable parameters are the ones that you’re writing in pencil. These are the ones that you can manipulate and change based on valuable assumptions and change the outcomes of what your financial model is going to look like. So variable parameters are these program elements that are part of this value proposition. Things like, what kind of a lift are we going to get in the average order of value or average dollar sales? What kind of response rates can we expect for certain promotions or to the program in general?

A new twist on, a surprise variable, whether it’s a new benefit or free shipping, or a new promotion idea. Things that come into play where you’d have to predict the outcome of that kind of a program.

3. Estimated costs

The parameters here are both fixed costs and variable costs. What’s your margin? There are technology costs, communications, there’s marketing. There could be labor costs, call center costs, management costs, analytic costs. All of these need to be considered when structuring a financial model and building a loyalty program,

4. The output

The first three elements of the program are all input parameters, the outcome is the element of the financial model that is really your output. What it is is the financial results based on all of those parameters, and this ecompasses incremental sales, the liability that you’re undertaking, ROI, profit and loss, and total spending by members of the program.

Complexity factors of financial modeling

There are five complexity factors of financial modeling: One is your program types or tier structures The second is the use case. The third is the required time frame of analyzing the program. Fourth up is a single model vs. multiple. And last, but certainly not least is the number of customer segments that need to be treated uniquely. It’s time to take a deep dive into each one again.

1. Program types or tier structures

From a program type standpoint, is this going to be a points based rewards program, spend and get, soft benefits program, or surprise and delight. With a tier structure,  this is where financial models can get a little complex because a tier is a different kind of level of customer that can be an announced tier or can be private, but based on certain behaviors, you can provide certain benefits. matrix allows you to include all of that in a very visual way.

2. Use case

Are you building a business case or are you benchmarking success in the kind of a program that you’re doing? Based on the kind of a use case you’re using this for, is what you would consider how complex you want to create and make this model, how much detail you need to put in there.

3. Required timeframe of analyzing the program

Is it just a six-month, promotional finite program, or is this an ongoing program that maybe you want to see five years out? Based on those parameters, it will dictate what kind of complexity you want to have for the program.

4. Single model vs. multiple

Is a single vision sufficient for the model or do you need multiple scenarios? For example, a more aggressive version, something that’s more realistic, and maybe a version that’s more conservative. And as you can imagine, those would be driven by your variable parameters.

5. Number of customer segments that need to be treated uniquely

Most companies do some kind of a customer segmentation scheme and those can add complexities to the model.

Expert tips to make managing your financial model a bit easier

In a points-based program use a bonus points bucket. And by that, I mean, you allow a percentage of points that’ll be issued throughout the year to your members in bonuses etc. Bonuses can be really difficult to incorporate realistically, so there’s a difficult way to do it, or a complex way to do it, is to actually try and measure those throughout each point in history and each point in time that you’re doing, and a bonus bucket solves this.

What’s next in loyalty? How about a better understanding of what it takes to have an
omnichannel loyalty strategy. Download the Buyer’s Guide to Omnichannel Loyalty.

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