Nothing puts the wind in a marketing department’s sail like consistent and effective customer engagement. The more clients continually return to an organization, the more opportunities  marketing is given to showcase the company’s latest offerings. And an increase in interactions with individual customers brings the ability to create better-calibrated solutions that meet their needs.

As a result, customer loyalty programs are a boon to marketing departments. These programs have the ability to drive up customer engagement, and provide companies with a detailed window into the nuances of individual purchasing patterns.

However, loyalty rewards programs come accompanied by risks that must be correctly negotiated if a company wishes to fully reap their benefits. These risks, known as loyalty program liability, stem from the fact that loyalty programs force companies to defer revenue in order to absorb the costs of delivering attained rewards.

In this article, we’ll discuss the role that marketing plays in minimizing loyalty program liability. Then, we’ll outline strategies for increasing the efficiency of loyalty rewards – giving you a blueprint for maximizing their return without expanding existing liability.

What causes loyalty program liability?

Loyalty programs incentivize customers to continue coming back to the business by giving them rewards for the purchases they make. Some common examples of these rewards include free products in exchange for buying a certain amount of goods, or access to special discounts only available to rewards club members.

Regardless of what the promised rewards are, however, they must bear some value, or customers will have no interest in them. Consequently, revenue must be set aside to cover the costs of injecting reward points with real-world value. The cost of this investment is known as loyalty program liability.

The effects of loyalty program liability and how they can be reduced

Problems arise primarily when the proper amount of revenue is not set aside to cover the liability. This can mean both overestimating and underestimating the revenue needed. Too much revenue set aside to cover loyalty program expenses results in a phenomenon known as “stuck revenue,” whereas too little revenue is directed at absorbing the liability, which reduces income.

Neither of these outcomes is desirable. So, how can marketing programs help reign in the byproducts of liability programs?

The best way for marketing departments to combat loyalty program liability is to craft campaigns that generate the necessary information for accurate breakage estimates. Breakage describes what percentage of rewards points go unredeemed, and is a crucial component for accurately modeling loyalty program liability.

Emerging technologies such as machine learning, advanced predictive analytics and even artificial intelligence, can help you make sense of these vast quantities of data.

Boston-based restaurant chain, Boloco, is a glowing exemplar of how to capture customer behavior through the aid of loyalty rewards programs. The growing culinary upstart gives its clients a personalized card to make purchases, and rewards them with a free item off the menu every time they reach the $50 milestone.

With the use of these loyalty cards, Boloco is able to increase customer engagement while also tuning into the pulse of customer breakage rates.

The bottom line

Marketing departments provide a critical window into program-wide redemption rates, allowing businesses to set aside the correct amount of revenue necessary to defray the incoming liability.

Companies should leverage breakage rate statistics harvested by marketing departments to extinguish the threat of loyalty program liability long before it hampers potential earnings.