The A(ctuary) in Loyalty Programs

It’s 2015 and loyalty programmes have become the norm in industries ranging from retail to healthcare. What started off as small perks to thank customers for purchasing products or services has fast evolved into the modern way of doing business. Not only are these programmes many in number but they have evolved into diverse and complex offerings that are now an integral part of service providers’ product suites. While some brands have developed loyalty programmes reacting purely to peer pressure, those gaining the greatest traction and attention from customers have created ecosystems around their offerings which are fully supported by their loyalty programmes. Such programmes have been developed to continuously create and enhance positive customer interactions, achieving greater loyalty through stronger and improved relationships with customers.
What is the role of the actuary in this space?
It is not immediately obvious that an actuary would have a necessary role to play in a loyalty programme. However effectively developing and managing a loyalty programme in today’s competitive market can greatly benefit from the contribution of an actuary. This is a result of the manner in which loyalty programmes have evolved, having shifted to becoming more complex and data-centric products involving risk, and opportunity.

The Evolution of Loyalty Programs

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Actuaries in Loyalty Programmes
The foundation to the successful development of a modern customer loyalty offering is the effective handling of large data. It is essential that this data is properly managed and analysed, and the key insights extracted in order to allow for opportunity identification and development leading the greatest level of product optimisation. This is where actuaries are uniquely positioned..

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A loyalty programme should be supported by other elements of a holistic Customer Relationship Management solution. These include campaigns management, customer analytics and marketing.

A few examples of actuaries applying their skills to loyalty programmes are useful to bed down the concepts we have raised.

  • Given the experience of rising costs of loyalty programmes (mainly driven by higher than expected take-up and mispricing), there has been increased vigilance in controlling their expenditure. Oftentimes, a budget is set aside at the beginning of the year to allow for the loyalty programme costs. The actuary will be tasked to reverse engineer changes to the programme based on the potential growth and behaviour of customers to ensure that the cost at the end of the year is within the prescribed budget.
  • Some companies are comfortable to meet the costs as they arise, but will require reserves to be set aside to meet these costs as they arise. An actuary will be tasked with calculating the value of the reserves, quite similar to the approach taken in life and general insurance companies.
  • Loyalty programs are often accompanied with campaigns to drive product or service take-up as well as data collection. Providing the feedback mechanisms to refine the loyalty program requires business intelligence reporting and financial modelling for business cases, cost projection and predictive analytics for targeted campaigning and leads extraction.

The skills of understanding the relationship between events and risks as well as being able to quantify them are as valuable to a loyalty programme as they are to an insurance company, especially as the program gains traction.
While ensuring the loyalty programme is financially sustainable, actuaries can use their big data and problem solving skills to ensure the product offering remains optimised to the unique needs of customers. Through these parallel objectives, actuaries are able to optimise loyalty programs that increase profit, augment marketability and ultimately add value to the customer experience.

Kudzai Chigiji & Matan Abraham

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