Loyalty programme

What it means

A loyalty programme is a scheme through which a company rewards customers for repeat purchases. It can take the form of points exchangeable for goods or discounts, cashback, membership tiers with growing benefits, member discounts or exclusive offers. The aim is to raise loyalty, purchase frequency and customer lifetime value.

Besides motivating customers, the programme gives the company data. It sees who buys what, when and for how much, and can tailor its offer, range or communication. These data are personal data, however, and analysing buying habits from them is profiling under the GDPR, with the related obligations.

A loyalty programme also has accounting and tax consequences. Points or credit earned by customers and not yet used represent the company's obligation to provide goods or services free or at a discount in future. For VAT, it must be assessed when and how the discount affects the tax base and whether it constitutes a voucher under the VAT Act.

How it works in practice

When designing a programme we recommend starting from the economics: what the reward costs, what increase in purchases is expected and how many customers will actually redeem points. A programme that gives away too much erodes margin; one with unattainable rewards puts customers off. Engagement, redemption and the effect on churn should be tracked continuously.

The CRM or point-of-sale system keeps each member's points balance, history and expiry rules. The programme terms must clearly state how points are earned and redeemed, when they expire, whether they can be transferred and what happens if the programme ends. When selling to consumers, the terms must be fair and understandable.

Under international standards, the part of revenue attributable to points is deferred until the customer redeems them. Under Slovak rules the treatment depends on the programme, often by recognising a liability or provision for the expected redemption. Redeeming points as a discount reduces revenue and, for VAT payers, the VAT base.

What to watch out for

The most common mistake is ignoring unredeemed points in the accounts. In a successful programme the liability can become significant, and leaving it out overstates profit. Customers' entitlements must also be respected when the programme changes or ends, or complaints and disputes will follow.

Watch consent. Joining a loyalty programme does not by itself mean consenting to marketing emails. These must be handled separately, and customers must be able to decline them without losing programme benefits unless that is the essence of the programme. Purchase data should be kept only as long as necessary.