How to use the loyalty points liability calculator
- Enter the points outstanding that customers have earned and not yet used.
- Enter what one point is worth when it is redeemed, in dollars.
- Enter the share of points you expect to be redeemed, based on past behavior. The rest are expected to lapse.
- Optionally open the advanced options to discount the liability, then read the liability, the breakage and the build-up table.
Formula
Expected redemptions = points x redemption rate
Value = expected redemptions x value of one point
Breakage = points x value of one point - value
Discounted liability = value x (1 + rate) ^ (-months / 12)
Breakage is the part of the face value that you expect never to be paid out. A discount rate of 0 skips the last line.
2,500,000 points worth one cent each
If every point were redeemed the liability would be 2,500,000 x $0.01 = $25,000. With 70% of points expected to be redeemed, 1,750,000 points are expected to be used, which is worth $17,500. The expected breakage is $7,500.
If the points are used on average 18 months from now and you discount at 5% a year, the liability becomes $17,500 x 1.05 ^ (-1.5) = $16,265.00. That figure is checked in the tests with a 60 digit decimal calculation.
What the number is for
A rewards program promises something later in exchange for a purchase today, so the points sit on the books as an obligation. A simple estimate multiplies the points by what each is worth and by the share expected to be used. The share comes from history: look at how many points of each age have been redeemed, not at the points issued last month, which have not had time to be used.
Because the result depends on the redemption estimate, a small change in that percent moves the liability a lot. The presets show 70% and 90% so you can see the range.
Value of a point
The value of a point can mean the cost of the reward to you or the retail price of what the customer gets. Which one applies depends on how you account for the program and on your accounting framework, so settle that first. The Credit Card Rewards Calculator works from the customer side, and the Journal Entry Generator can turn the liability into a balanced entry. For other estimates that depend on a collection rate, see the Allowance for Doubtful Accounts Calculator.
Assumptions and limits
- Every point has the same value and expires, if at all, on the same terms.
- The redemption percent is an estimate you supply. It is not predicted from data here.
- Discounting uses one average time to redeem. Real points are used over a spread of dates.
- How a program must measure the liability depends on your accounting framework and on whether points have a separate selling price. This tool shows the simple expected-value arithmetic only.
Frequently asked questions
What is breakage?
Breakage is the value of points that are earned and never used. It is the full face value minus the value you expect to be redeemed.
Should I discount the liability?
Only if your accounting rules or your own analysis call for it. Leave the rate at 0 to see the plain expected value.
How do I pick the redemption percent?
Look at older groups of points and see what share was eventually used. A new program with no history needs a judgment call, and the presets show how much it matters.
Can points expire?
Yes, and expiry is one reason points lapse. This tool does not model dates, so fold expiry into the redemption percent.