What is the role of activity-based costing in loyalty program evaluation?

• A. Allocate costs to customer activities to assess efficiency
• B. Ignore overhead
• C. Focus solely on revenue
• D. Use standard costing instead of activity-based costing

Answer: (A)

Activity-based costing is about tracing the true resources used by each customer activity and then assigning those costs to the customers or components that drive them. In loyalty programs, think of activities like enrollment, points earning and redemption, tier maintenance, targeted marketing, and handling customer service inquiries. ABC collects the costs of these activities—both direct and indirect overhead—and links them to the specific activities based on how much each customer or segment uses them.

This lets you see the actual cost of running each loyalty activity and the cost per enrolled customer or per loyalty tier. With those numbers, you can evaluate whether the benefits the program delivers (such as increased retention, bigger spend, or higher lifetime value) justify the cost of each activity. It also helps identify waste or over-investment—spotting which touchpoints are expensive but provide little value and where you might streamline or redesign the program for better efficiency and ROI.

Overhead is not ignored in ABC; it’s allocated through activities to reflect true consumption. Standard costing, by contrast, would apply broad, predetermined rates and miss the nuances of how different activities drive costs. Focusing only on revenue ignores the cost side, and ABC’s purpose here is to illuminate how much each loyalty activity costs and how efficiently it contributes to the program’s outcomes.