How Companies Put a Dollar Value on Loyalty, and Why They Do It
Marketers are told all the time that their customer data is valuable, but when it comes to some loyalty programs, that value is measured in more than marketing metrics. It's measured in dollars.
Take United Airlines. Its MileagePlus rewards program is so valuable other companies including Chase Bank pony up hundreds of millions of dollars to pre-purchase miles to offer as incentives to their own customers.
Creditors of recently bankrupt Caesars Entertainment Corp have valued the firm's coveted TotalRewards loyalty program at $1 billion -- higher than the price tag placed on any of its physical casino properties.
"I love that a marketing construct would add this kind of valuation to your brand," said Sean Claessen, executive VP, strategy and executive creative director at Bond Brand Loyalty. "The job of marketing is to produce value."
Bankruptcy-asset brokers and loyalty marketers see these CRM programs as more than business initiatives with intangible worth. Firms such as Aimia, a spinoff of Air Canada's frequent flyer program and formerly known as Aeroplan, devise economic models for global clients that estimate the cost and value of potential loyalty programs.
To determine the value of starting a loyalty program, companies might measure the cost of implementing the program in terms of backend technology development and management, staff training and launch communications. They would factor in fixed costs of running the program such as costs of administration staff and website operations. Finally, they would include the price of the actual items rewarded to members.
"The bulk of the cost of any loyalty program is the rewards -- what you give back to the customer," said Gerard Whelan, president of customer loyalty in the U.S. for Aimia. "Lots of companies have loyalty programs in place but they might not be measuring it particularly well. At the margins it can make a substantial difference."
Bond Brand Loyalty also develops economic models to show the potential value of loyalty programs to clients, sometimes conducting the analysis along with firms such as Bain and Company, Booz Allen Hamilton or Deloitte Consulting. Put simply, the analysis shows the predicted value of loyalt- program members spending compared to spending of non-members, or spending in the absence of a program.
For a company like Caesar's, that could mean evaluating the potential additional nights stayed at a casino hotel for members, and weighing the spending associated with another night's stay against overhead costs such as maid service or complimentary meals at the casino.
In a corporate acquisition or bankruptcy auction situation, the equations employed to valuate a program depend on who's buying. "It's an easier set of math to speculate as the hotel selling to another hotelier," said Mr. Claessen. "You know the mechanics of that business and how to speculate on its value."
The perceived value of the Caesar's rewards program could be much higher than actual cost. For instance, offering a free night's hotel stay could be a perceived value of several hundreds of dollars to a program member, but only cost the company the price of changing and laundering bed sheets and other maid services. And it can produce another day's worth of spending on meals, gambling, souvenirs, and other services.
"They enjoy all that revenue, but because the cost to deliver that dividend is so low it makes a huge difference when it comes to valuing that program," said Mr. Claessen. "More important is the incremental revenue the business is generating."
The My Starbucks Rewards program "is a good benchmark," said Scott Robinson, senior director, loyalty solutions at Bond, which does not work with Starbucks. When the caffeine slinger awards members a free drink following the purchase of 12 drinks, "The perceived cost of that dividend [by the consumer] would be 1/12 but it really doesn't cost Starbucks that to deliver that latte," he said. "They would probably be paying out something like 2% to 5% [of retail price] in terms of cost on their dividend."
The goal for Starbucks is to offset costs of the giveaway and create incremental profit.
United agreed to let Chase Bank reserve a maximum of $199 million worth of MileagePlus miles in 2014, $224 million in 2015, and $249 million in 2016 and 2017, according to United documents filed with the Securities and Exchange Commission. The deal permits Chase to market to United's customer database, and engage in co-branded promotional efforts.
"The people amassing these miles are actually very affluent customers," said Justin Yoshimura, founder of 500friends, a loyalty firm recently acquired by marketing data-services firm Merkle.
Without a loyalty program that engages members in a community of preferred customers, he suggested, "all you have is a database." He added, "With the program the fact that they're buying more and signing up for a [Chase] credit card is very valuable for the brand."
In another role as founder of Retail Growth Fund, a private equity fund that invests in e-commerce sites, Mr. Yoshimura evaluated the loyalty program for Caché, a bankrupt women's apparel retailer, which entailed gauging the amount of money frequent purchasers spend. "We actually placed a value on their loyalty program and inventory and their loyalty program and inventory was actually more valuable than basically the rest of the business," he said.
"Caché, without the loyalty program, they don't know which customers are omni-channel," he said, noting these programs enable companies to tie together otherwise disparate online and offline purchases to create a more holistic view of a consumer.