Financial Engineering: Why is it important for loyalty programs?
When thinking about loyalty programs, the first thing we must pay attention to is the project's viability, and to do this we must turn our gaze to Financial Engineering. This area uses different mathematical tools to find the best solutions in finance within a company.
For today's article, we invited Alix Gomes, the Financial Planning Analyst at Indico, to explain about the area and how it works within loyalty programs.
Financial engineering and loyalty
Financial engineering, in short, is the use of mathematical and statistical methods to find financial solutions that support decision making and strategy creation. Several scenarios are created with all the possibilities of investments and their results so that the client knows which is the safest path to follow.
Within loyalty, financial engineering needs to take into account the human factor as well as financial investments, thinking of all possible scenarios of public reaction to the loyalty program. This way, during the development of the program, you can define values that really make sense.
"The financial engineering is essential for the development of a good loyalty program, it is from this that the value of points, redemption and the investment needed to make the program viable are defined" - says Alix.
By looking at all possible scenarios for the program, the company can prevent possible periods of low audience participation. As already mentioned, the human factor is taken into consideration and is the basis for the projections, but it can also be unpredictable.
Imagine a customer who makes a purchase from your brand every month, the probability that he will continue with this pattern is high, but you cannot rule out the possibility that he will simply stop his consumption flow. This is not always to do with your company or products, but rather with external factors. Anything can happen, and a financial engineer anticipates these scenarios to find the best way to resolve them.
"Financial engineering allows the creation and visualization of several scenarios with the purpose of understanding the impact of changing one or another premise (a variable situation or value), like a butterfly effect" - adds Alix.
This process is known as "Sensitivity Testing," which is the act of visualizing how the program behaves from the variation of an assumption, thus discovering the sensitivity of the metric to the model, enabling the construction of a scenario for each relevant variation.
It must be remembered that all projections and calculated values are not random, they are developed using actual data and figures, and from these possible variations are created.
Building a business model in a loyalty program
In building a business model, CRM information is first used to analyze all customer bases in order to segment them. From there we start to create forecasts of how the average consumer will behave.
Knowing the possible behaviors of the consumer is the time to start studying the possibilities of customer interaction with the loyalty program, i.e. how will the dynamics of redemption and accumulation of points. With this information in hand, the financial engineer can discover the profitability and viability of the program.
"The essence of a good financial model is in its assumptions about the future performance of the business" - says Alix.
The role of financial engineering after the implementation of the loyalty program
When the program finally gets off the drawing board and is in place, it is the financial engineer's job to observe what predictions and scenarios have come true, what actually worked or didn't work. He then goes on to study possible changes and improvements.
If during the whole initial process the possibilities are thought and analyzed, with the loyalty program already implemented the actual data are used. Then, periodically, the financial engineer can reassess the profitability of the program and thus know how to keep it financially viable for the company.
"You have to know how to observe the risks and opportunities that arise when the program is actually launched and know how to deal with each situation" - concludes Alix.
Indico is a Brazilian Martech company with an experience that has reached more than 150 million customers in 9 countries, that develops solutions to combine Loyalty and Innovation creating unique connections between consumers and brands.
We create solutions that boost relationships and transform results.
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