Accrual and Redemption Process Overview

8/6/2019 Accrual and Redemption Process Overview

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1. Overall process

Note:The percentages and numbers are indicative


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1.1How Points Flow

PointsRedeemed

1.2How Cash Flow


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2. Accrual ProcessRules for Accrual of points can be set using the following means:

y Individual Brands will fix the accrual points as per their current structurey

Gross Margin Percentagey Net Margin Percentagey Equal Percentage

Option 1: Individual Brandswill fixtheaccrual pointsas pertheircurrentstructure

At present Brands are rewarding points on purchases and we cancontinue with the same

mechanism for providing loyalty points.

For example if customer A shops at Tanishq and Tanishqcontinues to award 3.5% of the making

charge, the customer earns 35 points for a 1000 rupee making charge. If he shops atEyeplus,heearns 500 points based on a 2.5% accrual from the Vista program. The total points at a central

TULIP account for customer A is 535 points.

Option 2:Gross margin percentage

Brands will reward the customers with points as per their gross margin percentage.Say 1/10th

of

the gross margin percentage will be given for everyRs.1000 purchase.

For Example Tanishq has a Gross margin of 30%,Fastrack has a Gross margin of 20% and Eyeplus

has a Gross margin of 10%, then Tanishq will award 3 points for every Rs.1000

transaction,Fastrack will award 2 points for every Rs.1000 transaction and Eyeplus will award 1

point for every Rs.1000 transaction.

Option 3:Net margin percentage

Brands will reward the customers with points as per their Net margin percentage. Say 1/10th

of

the net margin percentage will be given for everyRs.1000 purchase.

For Example suppose Tanishq has a Net margin of 20%, Fastrack has a Net margin of 15% and

Eyeplus has a Net margin of 8%, then Tanishq will award 2 points for every Rs.1000 transaction,

Fastrack will award 2 points (rounded off) for every Rs.1000 transaction and Eyeplus will award

1 point (rounded off) for every Rs.1000 transaction.


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Option 4:Equal percentage

Brands will reward the customers with points on an arrived fixed percentage which will be same

for all Brands. This number will be reviewed periodically by central loyalty team.

For example all the Brands will provide 1 loyalty points for every Rs.100 of transaction made. If

customer A shops at Tanishq and shops for Rs.5000, he earns 50 points. If he/she walks in toeyeplus and shops for Rs.1000, he earns 10 points.


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2.1Prosand ConsOptions Pros Cons

Option 1 : Individual Brandswill

fixtheaccrual pointsas per

theircurrentstructure

Thelogicofgiving pointsis

already beenarrived by Brands

by keepingin mindstheir

margins/rewardingappetite

andwecancontinuewiththe

same.

Thecurrentlogicofgiving

pointshas beenarrived keeping

in mindthecustomerwillcome

back tothesame Brandto

redeem them. Nowsincethe

customercanredeem the points

inanyoftheTitan Brands,this

mighthaveanimpactinthe

rewardingappetite.

Option 2 :Gross margin

percentage

Brandsabilitytorewarddecides

theamountof pointsgiventoa

customer

1. Thewayloyalty pointsaregiventocustomerwillvary

yearonyear basisthus

causingconfusion.

2. Outsiders/ Competitorscancometo knowwhich Brandismaking more profitsand

whicharenot.

3. Sincegross marginwill bedifferent basedoncategory

and productstrue

applicationofthis principle

will beinfeasible.

Option 3:Net margin

percentage

Brandsabilitytorewarddecides

theamountof pointsgivento

customer

1. Thewayloyalty pointsaregiventocustomerwillvary

yearonyear basisthus

causingconfusion.2. Outsiders/ Competitorscan

cometo knowwhich Brandis

making more profitsand

whicharenot.

3. Sincenet marginwill bedifferent basedoncategory

and productstrue

applicationofthis principle

will beinfeasible.

Option 4 :Equal percentage Less Confusion. Thelogicof

giving pointsissameacross

Brands.

1. Sincerepurchasing behaviorisdifferentacross Brands,so

would betherewarding

appetite. Enforcinga fixed

percentagegoesagainstthis

principle.

2. Each Brandisresponsible foritsown P&L. Therefore

enforcingaloyalty levy

wouldnot be feasible.


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3. SERVICE CHARGEThe distribution of service charge will be based on weightage of accrued points given by Brands for a

particular customer.

For example customer A has made a purchase in Tanishq and earned 400 points. He then walks into

Titan and has made purchase for which he earned 100 points. He then walks in to the Fastrack store

to redeem on a purchase of Fastrack watch ofRs.500 which has resulted in a new customer

generation to Fastrack and thereby Fastrack gives back a percentage of the transaction value. In the

above scenario, Tanishq share will be 80% and Titan share will be 20%.

However the service charge and the cash transferred for points redeemed will not be on a

transaction basis. This will be on a monthly or yearly basis whichever is been agreed upon.

Rules for calculation of Service Charge can be set using the following means:

y Fixed percenty Flat feey Flat orFixed percent (whichever is lower)Note:Customer acquisition cost (this number for every Brand can be calculated using marketing

spend for a previous period as well as estimates of new customers for the same period, subject to

discussion with the Brand).

Option 1:Fixed percent

Service charge percent depends on the BrandAverage Salerevenue and customer acquisition cost.

Service ChargePercent = (Customer Acquisition Cost / Average Sale Revenue) * 100

Service Charge = Service Charge Percent * Transaction amount

For example at Tanishq Customer Acquisition cost is Rs.175 and average Sale revenue isRs.35000,

then Service charge percent will be 0.5%. So now 0.5% of the transaction value will be paid as

service charge.

Option 2: Flat fee

Service charge will be Brand customer acquisition cost.

For example at Tanishq Customer Acquisition cost is Rs.175, then Service charge ofRs.175 will be

paid for each transaction.However, this service charge ofRs.175 will be same even though the

transaction amount is Rs.2000 or Rs.20000.


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Option 3: Flatorfixed percent(whicheverislower)

Service charge can be either Brand customer acquisition cost or Fixed percent of transaction amount

(same as option 1) whichever is lower.

3.1Prosand ConsOptions Pros Cons

Option 1: Fixed percentof

typicalcustomeracquisition

cost

1. Servicecharge percentdependsontheaverage

salerevenueof Brand

2. Servicechargeto be paiddependsontheTransaction

amount

Dependentoncorrect Customer

acquisitioncost from Brands

Option 2: Flat fee Less Confusion. Brand

Customer Acquisition feesdecidestheservicecharge

1. Each BrandhasitsownCustomer Acquisition fees.Enforcingthisasaservice

chargewill makeanegative

impactonBrandswithhigher

Customeracquisition fees

(e.g. new Brands)and for

Brandswithlower UCP.

2. DependentoncorrectCustomeracquisitioncost

from Brands

Option 3: Flator Fixed percent

oftypicalcustomeracquisitioncost

1. Servicecharge percentdependsontheaveragesaleof Brand

2. Servicechargeto be paiddependsontheTransaction

amount andcustomer

acquisitioncost

1. Each BrandhasitsownCustomer Acquisition fees.Enforcingthisasaservice

chargewill makeanegative

impacton Brandswithhigher

Customeracquisition fees

(e.g. new Brands)and for

Brandswithlower UCP.

2. DependentoncorrectCustomeracquisitioncost

from Brands


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4. Howdoes AccrualandRedemptionwork?4.1For Single BrandCase 1:

Suppose a customer X goes to BrandA and makes a purchase ofRs.100 and earns 5 points for the

transaction in the month of Jan 2011. Now Brand A owes Rs.5 to customer X.

Now the Profit and Loss statement for the Jan month for Brand A will look like

Description Amount

(MRP of item Rs.100), Sale (incl. 5 loyalty points) = (100-5) = 95

Actual Cost of item 70

Profit 25

Now the Balance sheet looks something like this

Asset Liabilities

Cash Earned +100 Loyalty PointGiven 5

Inventory -70 Profit 25

Case 2:

Now suppose the customer X goes to Brand A in the month of Oct 2011. He makes a purchase of

Rs.3 in the Brand and redeems 3 of his 5 points. Now Brand A owes Rs.2 to customer X.

Now the Profit and Loss statement for the Oct month for Brand A will look like

Description Amount

(MRP of item = 3), Sale = 3


Profit 2


Asset Liabilities

Cash Earned 0 Loyalty Point Given -3



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Case 3:

Now suppose the customer X goes to Brand A in the month of Dec 2011. He makes a purchase

ofRs.200 in the Brand. Part of the payment is done by user and remaining amount by

redeeming points. He pays Rs.198 cash for which he earns 8 points and remaining amount is

paid using 2 points. Now Brand A owes Rs.8 to customer X.

Now the Profit and Loss statement for the Dec month for Brand A will look like

Description Amount

(MRP of item = 200), Sale (incl. 8 loyalty points

earned) =

200 8 = 192


Profit 72


Asset Liabilities

Cash Earned 198 Loyalty Point Given 8 , -2



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4.2For MultipleBrandsCase 1:

Suppose a customer X goes to BrandA and makes a purchase ofRs.10000 and earns 500 points for

the transaction in the month of Jan 2011.Suppose he goes to Brand B and makes a purchase ofRs.

1000 and earns 100 points for the transaction in the month of Jan 2011. Now Brand A owes Rs.500

to customer X and Brand B owes Rs.100.

Now the Profit and Loss statement for the Jan month for Brand A will look like

Description Amount

(MRP of item = 10000), Sale (incl. 500 loyalty

points earned) =

10000 500 = 9500


Other Income

y Service Charge 0Profit 500


Asset Liabilities



Service Charge 0

Now the Profit and Loss statement for the Jan month for Brand B will look like

Description Amount

(MRP of item = 1000), Sale (incl. 100 loyalty points

earned) =

1000 100 = 900


Other Income

y Service Charge 0Profit 200


Asset Liabilities



Service Charge 0


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Case 2a:

In the month of Dec 2011 Customer X goes to Brand C and makes a purchase ofRs.600 with the

points he has earned. Brand C will have to provide the item to customer X by redeeming his points.

Brand A and B will have to pay BrandC, for this transaction. I.e.Brand A will pay Rs.500 and Brand B

will pay Rs.100 to share Rs.600 cost. While Brand C will have to shell out some service charge (Rs.54assumed) to Brand A and B, as they have got loyal customer of A and B.

Now the Profit and Loss statement for the Dec month for Brand C will look like

Description Amount

Sale (incl. 54 service charge paid) = 600 - 54


Profit 46


Asset Liabilities

Cash Earned +600-54 Loyalty PointGiven 0



Description Amount

Sale = 0


Other Incomey Service Charge given to Brand A by Brand

C

45

Profit 45


Asset Liabilities

Cash Earned (Profit

Payment made for

points redeemed atBrand C)

45-500 Loyalty Point Given -500

Inventory 0 Profit +45


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Now the Profit and Loss statement for the Dec month for Brand B will look like

Description Amount

Sale = 0


Other Income

y Service Charge given to Brand B by Brand C 9Profit 9


Asset Liabilities

Cash Earned (Profit

Payment made for

points redeemed at

Brand C)

9-100 Loyalty Point Given -100

Inventory 0 Profit 9


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Case 2b:

In the month of Dec 2011 Customer X goes to Brand C and makes a purchase ofRs.1000. Customer X

will pay part of the amount by redeeming his points and the remaining money is paid by cash.

Brand A and B will have to pay BrandC, for this transaction i.e.Brand A will pay Rs.500 and Brand B

will pay Rs.100 to share Rs.600 cost. While Brand C will have to shell out some service charge (Rs.54

assumed) to Brand A and B, as they have got loyal customer of A and B. Also Brand C will have to

provide 4 loyalty points for the Rs.400 purchase made through cash.

Now the Profit and Loss statement for the Dec month for Brand C will look like

Description Amount

MRP of item=1000, sale =1000-loyalty points-

service charge

1000-4-54


Profit 242


Asset Liabilities

Cash Earned +400+600-54 Loyalty PointGiven 4



Description AmountSale = 0


Other Income

y Service Charge given to Brand A by BrandC

45

Profit 45


Asset Liabilities

Cash Earned 45-500 Loyalty Point Given -500



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Now the Profit and Loss statement for the Dec month for Brand B will look like

Description Amount

Sale= 0


Other Income

y Service Charge given to Brand B by Brand C 9Profit 9


Asset Liabilities

Cash Earned 9-100 Loyalty Point Given -100


Accrual and Redemption Process Overview

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