Does anyone know how the Air Miles and other rewards work with ADS and the merchant and customers? Do the rewards come out of ADS' split of the profits, or the retailer's?
In learning about Berkshire's experience with the float at Blue Chip Stamps, it occurs to me that miles that a customer earns, but won't be redeemed for years would have the same characteristics as the float at BCS.
Th
Just to add some details:
Loyalty programs tend to report results with some variations but there are some underlying principles. I am relatively familiar with the Loyalty One sub but don't know much about other ADS subs.
Basically,
sponsors pay "fees" to ADS when
collectors use their loyalty cards during a purchase. This gives rise to a promise for rewards to
collectors which results in deferred revenue (ADS recognizes immediately some revenue as a "service" component). Accounting profit will be generated if the cost from
suppliers is less than revenue recognized. Estimates are influenced by breakage (points that will never be redeemed, about 20%) and average "life" of the reward (about 40 months).
You are correct in saying that funds can be held for some time between the accumulation phase and the redemption phase but, contrary to insurance float which is regulated and supervised, loyalty programs have more flexibility so due diligence is important.
How the float is invested can make a difference too as I understand that, with Blue Chip Stamps, return from invested float was the main ingredient for success and not the underlying business which was essentially in a run-off mode.
