How are loyalty programmes and customer reward assets valued?

Full Explanation

Loyalty programmes represent a complex intangible asset that combines customer relationship value with a financial liability. In a PPA, the loyalty programme is typically analysed as two components: the customer relationship asset and the deferred revenue liability. The customer relationship component captures the value of the enhanced retention and spending behaviour driven by the loyalty programme. Members of loyalty programmes typically show 15-30% higher retention rates and 10-25% higher spending than non-members. This incremental value is captured using the MPEEM, projecting the additional cash flows from programme members relative to a non-member baseline. The deferred revenue component represents the acquirer's obligation to honour outstanding points, miles, or rewards that members have earned but not yet redeemed. Under IFRS 15, this is measured at fair value (typically less than face value, reflecting expected breakage — the percentage of points that will expire unredeemed). Key valuation inputs include: programme membership count and growth rate, member engagement levels (active vs dormant), average points balance per member, redemption rates and breakage percentages, incremental revenue attributable to programme membership, and programme operating costs. The standalone selling price of the loyalty programme can be estimated using the residual approach or the adjusted market assessment approach. For companies where the loyalty programme is a core competitive asset (airlines, hotels, retail banks, retailers), the programme value can represent 20-40% of total customer relationship value, making it a material component of the PPA.

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