Loyalty Rewards and Gift Card Programs: Basic Actuarial Estimation Techniques

In this paper we establish an actuarial framework for loyalty rewards and gift card programs. Specifically, we present models to estimate redemption and breakage rates as well as to estimate cost and value for use in both accrued cost and deferred revenue accounting methodologies. In addition, we provide guidance on various issues and considerations that may be required of an analyst when working with loyalty rewards and gift card programs.

Keywords: loyalty rewards, gift cards, redemption rate, breakage, liability estimation, cost estimation, accrued costs, deferred revenue