How your loyalty program drives shareholder value
United Airlines recently announced a plan to mortgage its MileagePlus frequent flyer program to secure a $5 billion loan. Its loyalty program is valued at around $20 billion as a standalone business, comprising about 12% of United’s overall 2019 revenue and providing a much-needed lifeline to the airline as it continues to weather the COVID-19 storm. Delta, too, plans a $6.5 billion loan backed by the SkyMiles loyalty program.
While these numbers may seem astonishing, many brands inside and outside of the travel industry regularly attribute significant portions of their revenue to loyalty programs. In fact, loyalty leaders (those at the top of net promoter scores) are expected to grow 2.5 times faster and deliver 2 to 5 times shareholder returns over the next 10 years.
Loyalty leaders deliver a sustained increase in shareholder value by acquiring more customers, earning more share of wallet from existing customers, while increasing customer retention. The math seems simple, but what is often missing from the value equation are customer relationship health metrics such as satisfaction, active users, and retention – critical indicators of customer value. These metrics are intricately linked to revenue growth yet absent in company valuations, annual reports, and 10-Ks.
5 best practices
Let’s look at the recent Albertsons IPO, for example. The company’s 10-K considers the intangible value of customer prescription files but not for the actual value of its 20.7 million loyalty households, which “provides [Albertsons] with a comprehensive understanding of [its] core shoppers” and also “helps form an extended loyalty ecosystem that drives increased customer lifetime value.”
Loyalty programs, such as “just for U” from Albertsons, allow brands to amplify customer health metrics and build customer value. When any company invests in a loyalty program, it should focus on five areas:
- Providing differentiated value propositions that improve competitive positioning.
- Fueling customer identity to begin permission-based marketing, then deepen the customer relationship over time by learning about preferences.
- Increasing revenue by driving purchase frequency and purchase transaction value.
- Using marketing tactics to reduce financial liability so as not to overburden the balance sheet.
- Creating opportunity for long-term customer portfolio growth planning through lifetime value frameworks.
These best practices are linked to strengthening customer and shareholder value through the creation and elevation of the customer relationship as an asset.
Marketing and finance must connect
Despite the value a loyalty program delivers to brands, a disconnect often remains between the CMO and CFO. Even for best-in-class brands that tout loyalty programs as growth drivers and discuss high-level results in annual reports, finance should more clearly report loyalty program customer value as an intangible asset. Both CMOs and CFOs are required by GAAP accounting standards to report the financial liability associated with loyalty programs, yet it often stops there as the C-suite fails to account for customer value. This results in an imbalanced view of the brand’s balance sheet and an inaccurate picture of the company’s most valuable asset – customer loyalty.
Digitally native brands, many of which are disrupting Fortune 500 mainstays, understand the importance of customer value and have designed their businesses to harness the potential of their loyal customer bases to increase performance in a tangible way. More than providing high-quality services and products, these companies are designed to provide a total customer experience.
The RealReal, for example, is a digitally native luxury consignment marketplace that understands the value of reporting customer health metrics. It discloses gross merchandise value (GMV) by cohort, repeat buyers, take rate, active buyers, average order value (AOV), and buyer acquisition costs in its SEC filings. These metrics provide investors with critical insights on customer behavior that aren’t gleaned through traditional financial metrics.
How to start building a customer value model
Brands don’t consistently report customer-centric metrics because they aren’t required by accounting standards. While the industry waits for financial accounting bodies to adopt the latest customer value reporting standards, here are a few things companies can do to build a customer valuation model into their processes:
- Create a methodology to calculate customer lifetime value (CLV) and customer acquisition cost (CAC).
- Develop a customer cohort chart (C3) that tracks revenue by customer cohort, showing spending changes as customers age.
- Identify additional auditable metrics that reflect customer-relationship health.
Loyalty programs are a reliable source of transactional and behavioral data that can be used to operationalize measurement processes. Once processes and methodologies are in place, take the extra step to disclose customer metrics to stakeholders and investors.
Understanding your customer value is critical to sustained success for businesses of all sizes, with or without a loyalty program. You don’t need a loyalty program to start building these processes; however, one can help because it provides the frequency, spend, engagement, and retention data to inform customer value metrics – a capability many businesses need in order to accurately understand customer behavior.
Marketers focus on customer-centricity, but for most companies, it has yet to translate into shareholder metrics that can help investors understand the value of the brand and its customers. CMOs and CFOs need stronger collaboration between their teams. Marketing efforts impact acquisition and retention, and a customer-centric measurement approach can connect this to revenue and company value.
Driving customer-centric shareholder growth will be possible when financial reporting processes catch up to modern customer marketing and replace soft customer value metrics, such as brand engagement, with measurable ones like CLV and growth.