Customer Financial Intelligence: Why You Need It

Loyalty programs are complex financial entities. Teams from many disciplines, often with competing priorities, need to collaborate to successfully reach their goals. And whether it’s marketing, finance or accounting, each team has unique financial objectives that must be met and questions that must be answered in order to make progress.

As an analytical framework that measures the financial liability of each loyalty program customer, customer financial intelligence (CFI) gives teams the answers they need to make smarter decisions. CFI helps align teams within an organization, enabling the organization to capitalize on more opportunities, such as stronger customer relationships and a more profitable bottom line.

In this article, we take a deeper look into customer financial intelligence and how it can benefit your loyalty program.

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Accounting for Loyalty Programs: The Challenges & Opportunities

In my previous articles, we talked about the challenges faced by both loyalty program finance professionals and loyalty program marketers as they seek to create revenue-driving loyalty programs.

Now, we turn our attention to accountants, who face significant obstacles towards accurately accounting for loyalty program liability.

In this article, we’ll examine the role of accounting for loyalty programs, the frequent challenges encountered by accounting professionals, and the opportunity available to ensure a smoother close process.


The loyalty program accountant

Quarter end is often a stressful and hectic time for any accountant. They’re racing to close the books under tight deadlines, and auditors and senior leaders are asking tough questions about the company’s financial performance.

It shouldn’t come as a surprise that accountants strive for a smooth and efficient closing process; no surprises along the way, no excessive reporting.   


When it comes to loyalty programs, accountants are responsible for booking an accurate liability or deferred revenue estimate on the balance sheet, while ensuring that the organization is following the latest accounting standards and that auditors will sign off.

This means that not only do they face those tough questions from auditors and senior management, but they must also deal with managing unexpected changes in the company’s loyalty program liability.

Let’s take a closer look.


Asking tough questions — and expecting the right answers

The size of the loyalty program’s liability is an important consideration for accountants. In fact, it’s common for the program’s liability to be one of the largest on the company’s balance sheet. Consequently, loyalty program liability will draw scrutiny from auditors and senior leaders. Often, this leads to tough questions that many accountants struggle to answer, such as:

  • Why is the liability changing?
  • How confident are you that the estimate is correct?
  • How might we influence the liability to manage to our financial plan?

Unlike more tangible liabilities (e.g., accounts payable), these questions are complicated because loyalty program liability is an uncertain estimate. Answering questions about liability require the ability to predict redemption behavior over a long period of time, and convince stakeholders that your predictions are indeed accurate.


Managing unexpected changes in loyalty program liability

Unfortunately, these questions can get even more complex when there are unexpected changes to program liability.

Loyalty program liabilities are frequently in the hundreds of millions to several billion dollars. At this scale, even a small change in liability will end up having significant financial impact.

Seeing a quarter’s profits wiped out because of an unexpected increase in liability is not something anyone would want to deal with.

The challenge for accounting is having an accurate and reliable liability estimate. The estimate should be on par with the expectation, without any surprises. It should come complete with all the backup support and data necessary to satisfy auditors and any other stakeholders with questions. And, it should come quickly after quarter’s end to ensure more time for analysis.


The opportunity

Everything that an accountant booking loyalty program liability needs hinges on one core capability:  the ability to predict redemption behavior over time, while convincing stakeholders that the estimate model is reasonable. While predicting the future is never easy, there are tools in place to help you.

Sophisticated analytics, for example, helps you accurately predict redemption behavior. Imagine being able to point to actuarial backup that tracks the assumptions behind the liability estimate to prove that the data is emerging as expected.

You could confidently present your liability estimates to senior leaders and auditors, knowing that you have the right data to answer their probing questions. A sophisticated analytical model not only predicts today’s liability, it looks into the future to give you accurate estimates for what you’ll see at the close of the quarter.

What’s more, these analytic models can be continually refreshed, giving you updated liability estimates within days, and allowing you plenty of time to run the books and analyze the impact.

Suddenly, accounting for loyalty programs doesn’t seem quite as difficult, and quarter close becomes a little less stressful for everyone involved.



Turn insight into action with predictive analytics solutions that help you maximize the economic value of your loyalty program.  Contact us for a free consultation.

How to Convince Your CFO to Invest in a Customer Loyalty Program

Marketers are great at finding ways to drive customer engagement. They know how to use quantitative and qualitative data to uncover insights that drive desired behaviors. They empathize with the voice of the customer and are constantly thinking about optimizing the customer experience. Best of all, they use these skills to create effective campaigns and initiatives that drive customer engagement, build brands and grow businesses.

Ultimately, marketers hope that their efforts will not only enable a better customer experience, but help their company realize significant financial gains. One of the most effective ways they do this is through a customer loyalty program.


The struggle to achieve progress

Yet, the number one challenge I hear from marketers is how difficult it is to convince their CFO to invest in customer loyalty program initiatives. Finance usually asks very tough questions about these initiatives — questions that many marketers struggle to answer convincingly. Three of the most common questions include:

  • What is the incremental lift?
  • How big is the impact on customer lifetime value (CLV)?
  • What will the impact be on short and long term financial statements?

However challenging these questions may be, they provide CFOs and other members of the finance team with critical information about the cost — and risk — associated with an ambitious marketing plan. So, how can you prepare yourself to answer these questions and see your customer loyalty program through? We take a closer look at the reasoning behind the questions.


Question #1: What is incremental lift?

Convincing a CFO to invest in customer loyalty starts with proving the incremental lift. That is, the CFO wants to know if the campaign will drive extra profit above and beyond the status quo without the campaign.

If this incremental lift is sufficiently large, then the company should invest.

In a perfect world, measuring incremental lift would be easy. You’d set up two identical scenarios. In one scenario you’d run the campaign, and in the other you’d keep the status quo (i.e., without the campaign). You’d then observe how each behaves over the long term.

The difference in profit between these two scenarios is your incremental lift. Quantifying the incremental profit over the long haul is essential when it comes to capturing the campaign’s total impact.

But convincing the CFO to invest in loyalty isn’t easy. And unfortunately, one can’t measure incremental lift with complete precision.

Predictive models can help measure incremental lift in a reasonably accurate and defensible way, however, and include some of the best tools available to help marketers get loyalty program buy in from key stakeholders.


Question #2: What is the impact on customer lifetime value?

In addition to knowing the incremental lift, convincing a CFO to invest in a loyalty program requires you to understand its impact on customer lifetime value.

Finance 101 teaches us that the value of a company is more or less equal to the sum of the stream of future profit from all its customers — and CLV is a critical metric that captures this information.

It stands to reason that any marketing campaign or strategy that improves customer lifetime value is a sound financial decision. While this may be true, it isn’t necessarily the rule, since companies still need to manage financial statements.

The difference between costs and revenue can further complicate the decision.

The challenge here is that determining CLV requires the ability to predict customer behavior over both the short and long term. This is very hard to do. Most companies, therefore, limit themselves to predictions over shorter time frames, such as a few months.

In doing so, these businesses limit the opportunities to see returns.

If companies were to see the bigger picture, they would find that there are numerous opportunities to see returns over the long term. Marketers can benefit greatly if you have a believable model that can make long term predictions. This makes convincing the CFO to invest in loyalty a little bit easier.


Question #3: What is the impact on short and long term financial statements?

There are also some practical considerations beyond customer lifetime value and incremental lift that are important when it comes to convincing the CFO to invest in loyalty.

All companies need to manage their financial statements, particularly publicly traded corporations. This is a marketplace reality that isn’t going to change any time soon — and it often creates short term financial pressure on companies that are expected to meet Wall Street’s numbers.

This makes it critical to set correct financial expectations.

The financial risk associated with loyalty programs is often underappreciated. Most people don’t realize that loyalty program liability is often one of the largest on the balance sheet.

It’s common for these liabilities to run anywhere from hundreds of millions of dollars to several billion dollars. Furthermore, even the smallest change in liability has the ability to cause significant financial impact.

So despite the best intentions, new marketing strategies, campaigns and initiatives make it difficult for the finance team, as these all include levels of uncertainty. This affects liability and expected future revenue, and makes it challenging for finance to set the right financial expectations.

To get buy in from your finance team, you need to give them confidence about the short and long term implications of your marketing initiatives on their financial statements.

They need to understand the methods used to make and monitor underlying assumptions as new data emerges to help them manage the expectations of their stakeholders. This is the key to convincing your CFO to invest in loyalty.


How to convince your CFO to invest in loyalty

Whether you’re trying to measure incremental lift, customer lifetime value or the impact of your loyalty program on financial statements, having data that predicts member behavior over time will be crucial to getting support from your finance team — including the CFO.

Predicting such behavior isn’t an easy task. But there are tools out there that can help. Predictive modeling solutions allow you to quickly answer finances’ questions, and have the data and key metrics you need on hand to prove the true value of your loyalty program — for customers and your company’s bottom line.



Looking to maximize the economic value of your loyalty program? Contact us  for a free consultation.


And to learn more about loyalty program liability, don’t forget to check out:

What is Loyalty Program Liability?

The 1st Question to Answer if You Manage Loyalty Program Finances

The 2nd Question to Answer if You Manage Loyalty Program Finances

Accounting for Loyalty Programs: The Challenges & Opportunities

Customer loyalty, predicted

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Customer loyalty, predicted

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