Fighting for Loyalty’s Incremental Value

Sara Galloway: Hi everyone. I am really excited for today’s conversation. A lot of loyalty teams, certainly the clients we talk with every day, are under immense pressure right now to prove the value of their loyalty program. It is no longer enough to say members are spending more. Brands now need to prove what loyalty is actually driving, and what is truly incremental. So we have brought in an expert today, and I am thrilled to have Leg Llaguno, founder of Kyros, joining us. We have worked with Len and his team to highlight incrementality across some of the programs we support, and they are sharp, data-driven experts who know how to prove loyalty ROI and surface the metrics that matter. Today we will talk through those perspectives and some of the content in the Kyros report, The Hidden Economics of Loyalty. Len, thank you for being here. To start, would you introduce yourself and tell us more about Kyros?

Leg Llaguno: Thank you for having me. I am excited to be here. So I am Len, the founder and managing partner at Kyros. We hear it all the time when we work with clients and talk with people in the industry. People are tired, because they have a CFO or another important stakeholder who thinks loyalty is a cost center. We have a lot of empathy for that. They know the program is working. They just cannot prove it. Sometimes it feels like they are the only one who gets it.

What we do at Kyros is put a number on every member, every benefit, and every lever, to turn loyalty stories into loyalty math. That is what turns a CFO, a board, and other stakeholders from skeptics into advocates.

We sit in a unique position in the ecosystem. Think about all the stakeholders around a loyalty program. There are the loyalty program managers. Within the enterprise, they have a finance counterpart who is responsible for booking the liability and doing the financial reporting. Then there is the auditor, who holds the finance team accountable for accurate numbers. We sit right in the middle of all three. We help the finance team get the right assumptions around breakage and the liability so they can book accurately and see risks before they materialize. We work with the auditors to get them comfortable that the numbers are accurate and reasonably stated. And we work with the loyalty program managers to show that the program is creating real value despite the costs we have to account for. Sitting at that intersection of finance, accounting, and loyalty gives us a fairly unique perspective.

What changed between loyalty, marketing, and finance

Sara Galloway: That is a perfect segue into the first topic. Every brand I talk to right now is feeling the pressure, and I am glad you raised the disconnect between budget creator and budget owner, with different groups added into the mix. In your 2026 report you talk about programs facing new levels of pressure and scrutiny. For our audience, what has changed in the last year between loyalty, marketing, and finance?

Leg Llaguno: Over the past couple of years we have been on a bit of an arc. During COVID, the airline loyalty programs had to disclose a great deal, because they used those programs as collateral to get loans to survive the pandemic. That opened a lot of eyes to the power of loyalty and how valuable these programs can be. Many of us in the industry already knew it, but now it was fully disclosed. The numbers were there as hard evidence. Since then, people have wanted to better understand how these programs create financial value, so they are asking harder questions. Historically it was all about driving engagement, net promoter score, and building brand. Now the board wants to know what it means in dollars and cents, and what it means for the stock price. Connecting engagement to enterprise value creation is being brought to the fore.

Where AI helps, and where it falls short

Sara Galloway: With all of that pressure coming in, I love your perspective on this. When brands debate whether they can just use AI to solve this, versus when they actually need an expert, where can our listeners get started on a self-serve basis, and where do they need someone with deeper expertise?

Leg Llaguno: AI is very good when there is a tremendous amount of training data about how to solve a particular problem. Understanding incremental value for a loyalty program is not one of those domains, because it sits at an esoteric intersection of expertise. To tackle it, you need a deep understanding of the loyalty program business model, and you need to translate that into the language of business, which means economics, accounting, and finance. The core of how loyalty programs create value centers on customer lifetime value, and on how customers behave over long horizons. That is a difficult long-term prediction exercise, so you also need actuarial science, the science of predicting over long horizons, and data science, the science of using large data sets to uncover insights. You have to sit at the intersection of actuarial science, data science, finance, accounting, economics, and loyalty programs. No data set exists that sits at all of those intersections.

That is what we bring. A lot of companies say they can use their data scientists for this. But how many of those data scientists have read the accounting standards to understand how loyalty programs flow through the financial statements? How many know the difference between a balance sheet and a P&L, or a debit and a credit? Probably not many, and that is critical if you want to translate engagement into value creation for the enterprise.

So AI is tremendously helpful. At Kyros we use a lot of it to accelerate our speed. We write a lot of code, since much of what we do is rooted in data science, and the machines can write in a split second what might take a human a couple of hours. But they are not going to take over everything. The other piece is that what people ultimately want in business is someone to hold accountable, particularly in finance, where you are making representations about numbers to investors and shareholders. You do not want to hold a machine accountable for that. You want a person. So AI helps people like me and actuaries do our work, but ultimately we can be held accountable.

Why customer lifetime value is the scorecard that matters

Sara Galloway: It is great to have an agency to help deploy and measure incrementality in a way executives can understand. One of the biggest areas we have talked about with you and our clients is incremental value and how it changes customer lifetime value. Why is customer lifetime value the right, or maybe the most important, economic scorecard for loyalty?

Leg Llaguno: I love how you framed that, the most important economic scorecard, because I believe it is precisely that for loyalty programs. A loyalty program creates value in many ways, but one of the most important is improving retention. And we do not just care about retention next month. We want more people coming back the month after that, and the year after that, and the year after that. The real value is improving retention and then letting that improvement compound over many future periods. If you only look at value creation over a short horizon, the economics are very hard to make work. It is the compounding over a long horizon where all the value is. The number that puts long-term retention into dollars and cents is customer lifetime value. That is why it matters so much.

The additional concept is that loyalty programs are in the business of increasing customer lifetime value. It is good to know what CLV is today, but what we are really trying to do is increase it. That is the name of the game. That is why we define incrementality, or incremental value, simply as how much customer lifetime value is changing because of the loyalty program. If you are increasing customer lifetime value, you are saying the business will generate more profit in the future. Anyone who has taken an introductory finance course learned that companies are valued as a function of how much profit is expected in the future. So if we increase customer lifetime value, we expect more future profit, which means the enterprise is worth more. There is a direct connection between what we do with loyalty programs and enterprise value creation. It has always been there. We just need to connect the dots.

Why “members spend more” does not prove incrementality

Sara Galloway: I want to hit on some of the KPIs you highlight in the report around enterprise value creation. But first, I hear this a lot. Prospects come to us and say their members spend so much more than their non-members. We have a perspective on why that falls short, but you are the expert. How does that comparison fail to measure incrementality?

Leg Llaguno: Everybody does this. It is the number one metric people reach for. They say members spend ten times more than non-members, which is a great soundbite, but it conflates a couple of ideas. What we really care about is how much the loyalty program caused that change in behavior. Most of the gap between members and non-members was not caused by the program. It is caused by self-selection. Your best customers are far more likely to opt into the program, because they know they will get value from it. Your worst customers, who know they probably will not come back, do not bother. The program did not cause your best customers to spend more. They were already going to spend a lot. The trick with incrementality is nailing down how much was actually caused by the program. That member-versus-non-member comparison is made up of a self-selection effect and a true incremental effect. When you do not separate them, you are taking credit for self-selection as if it were incremental.

The KPIs that signal incremental value

Sara Galloway: That makes sense. Once someone joins, the real question is how much more you are gaining from them in customer lifetime value. In your report you identify this simply, not that the analysis is simple, but you lay out the operational KPIs to focus on. I think you cover acquisition, activation, return, and redemption as the practical KPIs that signal changes in lifetime value. Why are these the starting points brands should go after?

Leg Llaguno: I should caveat that those are the ones we used in the report. For an industry analysis, you need a generic set of KPIs you can look at across many companies. The specific KPIs differ from company to company. Still, these are very helpful, and building them certainly does not hurt. They are key inflection points in the customer journey where customer lifetime value changes dramatically. Inflection points matter because, as loyalty practitioners, we are in the business of increasing customer lifetime value. So it helps to understand where that increase happens. If we can get more people through those inflection points than otherwise would, we are creating incremental value.

If you study the customer journey through an economic lens rather than a customer experience lens, a few inflection points stand out. Activation, the first revenue-generating transaction, is critical. Whether they come back for a second transaction is critical. Whether they reach redemption is critical. We looked at these because we intuitively knew they would matter and because they generalize across loyalty programs. And the data confirmed it. You see a material change in customer lifetime value when people pass through them. These are at the beginning of the journey, though. You need more inflection points later on as well.

How redemption drives lifetime value

Sara Galloway: Let’s dive into one that rings true. A lot of brands believe their program is working, but the cost of rewards feels really high. There is a difference between reward achievability, reward desirability, and actually using the rewards. In your report you call out that a higher redemption rate can be good, yet a lot of organizations treat it purely as a cost. How should brands think about redemption as a driver of value rather than a revenue decreaser?

Leg Llaguno: I would reframe it as redemption as a driver of CLV, because CLV is our North Star. Something critical about CLV is that it is a prediction of the total profit a customer will generate over their lifespan, over a long horizon, including the future from where we are today. And it is profit, so it is net of cost of goods sold and, crucially for a loyalty program, net of redemption costs. The number one driver of redemption cost is the ultimate redemption rate, which is the share of points a person has that actually get redeemed. We look at it net of that cost, because we care about how much profit we generate above and beyond what we give back.

One of the key things we can study is the relationship between ultimate redemption rates and customer lifetime value. What we consistently see is that as ultimate redemption rates increase, customer lifetime value also increases. As redemption rates rise, your margin actually decreases, because redemption costs eat into it. But that decrease in margin is more than offset by the increase in volume, because those customers are much more likely to keep coming back. It is a simple trade-off in the data. You are sacrificing margin for more revenue, and if you play it right, the revenue increase more than offsets the margin decrease.

That is a critical point. Higher ultimate redemption rates, by and large, are good for business. But it is hard for companies to see that if they cannot quantify the relationship between redemption rates and customer lifetime value, and if the finance team is focused only on short-term metrics. If the goal is purely to manage short-term cost, then yes, they should cut costs. But no business school teaches that as what you should optimize for. It is very difficult for an organization to let a loyalty program thrive if it insists on that perspective.

Sara Galloway: Do you have a quick metric someone can measure after a first redemption that signals CLV is going to go up?

Leg Llaguno: Every company has a different cadence of customer activity, but you can look at the probability that someone with a first redemption comes back for another earn within three, six, or twelve months. That is a really good KPI for understanding whether they keep coming back. Then you can extend it. After a second redemption, what is the probability they come back again? You can define a million KPIs this way, so there is an art to paring down to the ones you will actually pay attention to.

Sara Galloway: Your report does a nice job highlighting the flywheel effect once redemption comes into play, and you call out the second redemption. A lot of brands think they just need to get customers to the first reward, but you highlight that maximized CLV comes after the second.

Leg Llaguno: It is really important after the second to set up goalposts you are monitoring across the whole lifespan of the customer journey, to make sure it stays healthy.

Small gains early compound across every future cohort

Sara Galloway: Let’s go a little earlier in the journey. You highlight activation, a first earn within a few months of joining, as a critical inflection point, and you note activation can be as low as 10 to 20 percent in some programs. Getting people to make even one purchase is hard. Thinking programmatically rather than just about KPIs, what does that low number tell you brands might be missing?

Leg Llaguno: Potentially two things. In a lot of cases we show these metrics to our customers and they have never seen them, so they are surprised. That highlights a gap in simply looking at these values. It is important to actually see them. The second thing you realize when the number is that low is how much upside there is. If only 10 percent of the people who joined go on to transact, there has to be an opportunity to move that up by hundreds or even thousands of basis points. Even getting from 10 to 20 percent doubles it, and there may be more room from there, because these people already had enough momentum to join. Surely we can find ways to ride that momentum and get more of them to the earn.

Sara Galloway: I have also seen that when someone enrolls with a purchase, it can inflate activation, and sometimes the second purchase or return acts more like a true activation metric. It is helpful that even small movements in those early lifecycle stages have the largest impact.

Leg Llaguno: They have amazing impact. If you can programmatically move that KPI up, one of the most valuable things is that every future cohort you acquire benefits from it. You have made every future cohort more valuable, for the rest of time. There is so much value to create just by investing in improving these KPIs.

Sara Galloway: Mind blown. That is such a good call out.

Managing incremental value versus proving it

Sara Galloway: So here is the big question as we talk about incrementality. These KPIs signal incrementality, but they do not necessarily prove it on their own. What does a brand actually need to do to prove the program caused the value?

Leg Llaguno: That is the million-dollar question. I like to differentiate between incremental value management and proving incremental value. Incremental value management is a practical exercise. We are trying to manage the business to create more incremental value than existed last year. It is constant, year-over-year improvement, which is how most businesses run. Are we increasing customer lifetime value year over year, and are we getting the signals that help us understand it is increasing? These KPIs are great for that, and that is what we should focus on day in and day out as we execute the business.

Proving incremental value is a theoretical question. It is not something you do every day or every month. It is an exercise you do every now and then, and its goal is not to prove you increased CLV from last year. It is to answer a different question. How much profit would have been generated if the loyalty program did not exist at all? You are comparing the profit you generated with the program to a counterfactual where it does not exist, which you cannot actually observe. So the first thing to put on the table is that it will not be a perfect answer. You cannot transport yourself to an alternate universe where everything is the same except the program does not exist. You have to proxy it as best you can.

How to prove the program caused the value

Leg Llaguno: The first question you come to is whether you can A/B test the loyalty program, because A/B testing is the gold standard for proving causality. It comes from testing whether medications work. You give one group the medication and a similar group a placebo, and you see what happens. In the world of loyalty programs, you cannot A/B test the whole program. There is a practical reason, which is that nobody has the appetite for a long-term test over years, since the value is created over a long horizon. There is also a legal constraint, because the terms and conditions make it very difficult to explicitly stop people from joining.

What you can do is run shorter-term tests. You can prove that the currency works to change behavior. You run campaigns where you give bonus points and see that it drives behavior change. Done correctly, with proper holdout samples, that is the most statistically rigorous way to answer the question of whether the loyalty program caused the result. It is not perfect, and it is not A/B testing the entire program, but it is the next best thing. In business we do not need perfect. We need useful, and this is tremendously useful. Running experiments is the other half of closing the gap on incremental value.

Sara Galloway: I love that you differentiated between management and the actual effort to prove it. How often should a brand be measuring incrementality, the proving of it rather than the management?

Leg Llaguno: Honestly, maybe once a year, maybe once every couple of years, because it is so theoretical, and it is not going to change the day-to-day management of the business. If you can get into a cadence where you are telling an ongoing, data-driven story about how you are improving customer lifetime value, and that is the main narrative, then the desire to prove ground-up incrementality against a world where loyalty did not exist gets diminished, because the narrative is focused on management rather than the theoretical question.

The one-sided ledger problem

Leg Llaguno: But nobody is there yet. Where we are today is that every single month, the finance and accounting team books the liability and looks at the cost. They explicitly quantify the cost, because the accounting standards require it. What the standards do not tell them to do is quantify the value the loyalty program creates. In fact, if you interpret the standards, they would probably say you cannot put that value on the balance sheet. So every month we remind important people in finance and across the organization about the costs of the loyalty program, and there is complete silence about the value. Is it any wonder people think loyalty programs are cost centers when all they are looking at is a one-sided ledger about the cost? Of course not. We have massive inertia stacked against us as loyalty professionals because of the mechanism of that accounting cadence.

What has to change is that every month we need to remind them we are creating value, and then say that, as a result, the liability is what it is, and that is fine, because what we really care about is the value creation. That is not happening today, and that is the opportunity. We are trying to help our clients drive that transformation. When we get there, there will be less pressure across the industry to devalue these programs, which is so detrimental to customer loyalty.

Sara Galloway: It is happening all over right now.

Leg Llaguno: Exactly. And why? Because it is hard for people to tell data-driven stories about the value being created. When the costs are clear but the value is ambiguous, of course the CEO is going to say they are chopping it. There is an imperative there, because if we do not do it, the next time the economy dips, the program is on the chopping block again. Every time that happens, customers are smart. They see the devaluation and they say it really hurts their loyalty to the organization, which almost defeats the purpose.

Sara Galloway: You are making it so much harder for me to receive value now.

The mindset shift, and where to start

Sara Galloway: This conversation has been fabulous. I have a closing question. As loyalty practitioners and brands listen in and realize they do not have a strong answer to how much incremental value their program is driving, outside of calling you, what should they do first?

Leg Llaguno: Outside of calling us, download the report. There is really not a lot of educational content on this, because it is an esoteric field. To understand incremental value, you cannot do it without understanding the relationship between CLV and ultimate redemption rates. That relationship defines the economics. So download the report, The Hidden Economics of Loyalty, and check out our website. We put out a lot of educational content on measuring incremental value, ultimate redemption rates, and how to de-risk the liability, the financial and actuarial components of loyalty programs that most people do not know much about. That is a great starting point. And then call me, because I would love to help.

Sara Galloway: I have seen the fruits of that labor firsthand, so I can attest to the quality of your team’s work on incrementality. As a closing thought, if you could guide practitioners and loyalty leaders to shift their mindset and take one thing away from your reports, what would you want them to shift away from, and toward?

Leg Llaguno: That it is possible to measure incremental value and tell a data-driven story about the value they are creating, and to get recognized for it. It is a lot of work and it is not easy, but it is important work.

Sara Galloway: I love that. We have been in this industry a long time and know firsthand the value of a loyalty program, so it is great to know there are partners like Kyros helping to prove it, so this industry can stay ahead of the curve as it has for years. Thank you for helping make that possible, and we appreciate your time today.

Leg Llaguno: Thanks for having me. This was a lot of fun. I appreciate it.