In my previous articles, we talked about the biggest struggles for loyalty marketers and the challenges accountants face when booking loyalty program liabilities. Take note that loyalty finance professionals are another key stakeholder that faces a number of obstacles.
Unfortunately, there are not many resources for finance professionals that support loyalty programs. This makes a loyalty finance professional’s struggle for progress very challenging. Read on to know what kind of progress loyalty finance professionals work toward along with the obstacles they have to face.
The Progress Loyalty Finance Professionals Desire
Like most people in finance, a loyalty finance professional strives for stable and predictable financial results. This means that they need to accurately forecast the loyalty program’s financial performance.
These predictions include how the loyalty program liability will emerge, the cash flow and revenue recognition from the redemption of points, member acquisition costs, the profit contribution from member spend, etc.
Also, forecasts are made over short and long term horizons, performance against forecasts is monitored and any variance is explained.
The more strategic loyalty finance professional will also think about optimizing the financial value of the loyalty program and the efficient way to do so. That is, they want to participate in discussions about how to optimize customer lifetime value and incremental lift.
The Struggle to Achieve Progress
Loyalty finance professionals face a number of obstacles in the way of their progress:
- Wall Street demands accurate financial forecasts
- Marketing’s is constantly changing things
- Timing differences between recognizing costs and benefits
- Technical challenges of building predictive models
We’ll evaluate each of these in this section.
Wall Street Demands Accurate Financial Forecasts
One of the biggest challenges finance professionals face is the pressure from Wall Street to meet expected financial results. This puts enormous importance on managing expectations. Furthermore, this issue is amplified because of the leveraged financial risk associated with loyalty program liability.
It’s common for such a liability to be from hundreds of millions to even several billion dollars. At this scale, even a small percentage change in liability will have a leveraged effect and can drive a large variance in financial results.
For more information on loyalty program liabilities, check out “What is a loyalty program liability?” and “The 2nd Question to Answer if You Manage Loyalty Program Finances.”
Marketing is Constantly Changing Things
It certainly doesn’t help that the marketing department is also constantly trying to implement programs and campaigns to drive engagement. If successful, these programs will impact member behavior, affecting point earning, point redemptions and future spending. All these mentioned factors can have a direct impact on how financial results emerge.
The constant change and fluidity of the program management decisions make it very challenging for any loyalty finance professional to translate marketing strategies into an accurate prediction of financial performance.
Timing Differences Between Recognizing Costs and Benefits
The nature of accounting rules adds a layer of complexity. Campaigns to drive increases in engagement will drive immediate cost increases since an increase in point earning or expected future redemption behavior will hit the financial statements in the form of a change in the program liability.
Unfortunately, the expected growth in future profit contribution from your members is not an asset you can recognize on the balance sheet. The short term implication is that you recognize all the cost and none of the benefit. This means smaller profit in the short term. Untangling the impact of this timing on financial statements can be tough.
Technical Challenges of Building and Implementing Predictive Models
The loyalty finance professional is asked to predict customer lifetime value, incremental lift and how financial performance will emerge and impact financial statements. These are complex modeling exercises to tackle!
Most organizations struggle with this, mainly trying to make predictions over long horizons. They default to predicting behavior over shorter periods. For loyalty finance professionals interested in optimizing the financial value of the program, the ‘short horizon’ limits the set of acceptable opportunities to only those that pay back quickly. These are likely few and far between.
Understand that there are more opportunities that pay back over longer horizons, but most professionals don’t have the ability to evaluate them.
Lastly, there remains the struggle to have fresh and relevant information to support the on-going business. Operationalizing models to continually score new data as it emerges is critical for loyalty finance, so all decisions are based on the latest batch of data. This is possible, but it comes with all kinds of implementation and management challenges.
Imagine Making Progress in Loyalty Finance
Regardless of whether you’re trying to translate marketing strategies into financial implications, set expectations for the emergence of financial statements, or uncover ways to optimize the economic value of the program – all of these things tend to have a common thread of requiring the ability to predict member behavior over short and long horizons.
You might think that this can never be easy, but let’s imagine if it was.
Imagine being able to seamlessly incorporate the ever evolving marketing campaigns into your predictions. You could scenario test and vet the financial implications of these strategies, feeling confident that these are smart marketing and financial strategies.
You could evaluate the tradeoff between short vs long term decision making and give leadership the information required to disarm short term pressures.
Imagine having an accurate estimate of how the financial statements were going to emerge over the next 12 to 24 months. Suddenly, financially planning and setting expectations becomes much less stressful.
Imagine having all these predictions continually updated and available for you to monitor and mine for data. On-going management of expectations about financial results will become easier! Telling the story about variances will become easier!
Imagine having the ability to uncover the behaviors that drive financial performance. You’ll be armed with the knowledge to help the organization think about how to optimize the financial health of the loyalty program.
Think of how much progress you could make!
Do you share these Loyalty Finance struggles in your professional progress? If so, schedule a call to learn how SnapshotML can help.