Loyalty Program Liabilities and Point Values

Loyalty points are a currency the firm issues, and the future service they promise appears on its balance sheet as a liability. We show that the optimal total value of outstanding points should track the firm’s “profit potential”—realized cash flows plus deferred revenue. Point values rise with stronger operating performance and greater uncertainty, allowing loyalty programs to buffer fluctuations in future performance and providing a rationale for them beyond marketing or competition.

Manufacturing & Service Operations Management, vol. 22, no. 2, pp. 257–272