Redemption: Friend or Foe of Loyalty Programs?



Truthbomb time: loyalty reward redemptions are a win-win.  The debate is over.  Redemptions are good for you.  Stop preventing them!  In fact, start encouraging them!


You should see on average a 20-25% lift in spend and engagement after the reward redemption, based on my experience and depending on the industry and the value of the reward.  This is due to the halo effect the redemption has on the member’s brand perception and the psychological impact of having their balance dip below their preferred threshold.  When a points balance falls below their comfort level, they feel compelled to replenish it by shopping.


The first question you may be asking is when is a good time to drive redemptions.

1.     Your accounting principles.


TL; DR: Drive profitable redemptions, while keeping an eye on maintaining your breakage ratio.

Depending on your country’s regulations and industry best practices, you may differ on when and how you recognize revenue, reward liability, and points expiry. 

For those that accrue the full cost of the reward liability at the time of sale (with the provision for breakage), redemptions are beneficial: they count as a sale.

For others, reward redemptions may count as an expense, in which case, there may be company-wide questions as to whether redemptions should be “managed”.

Your ultimate redemption ratio (URR), which is the % of lifetime points that your accounting department expects to be redeemed, has a material impact on your bottom line and ABSOLUTELY needs to be managed.  At the same time, you can drive profitable redemptions and review whether your URR does need to be adjusted (even given shorter-term profitability hits) to reflect the true engagement opportunity among members.


2.     Each customer’s profitability when you include reward costs.


TL; DR: Target only profitable customers for redemption promotions.


We all know there are customers we would like to fire: they only shop on promotion, buy low-margin goods and services, spend endless time needing customer service support, and redeem for high-margin rewards.  Conversely, we have customer darlings that do the exact opposite:  they are price insensitive, willing to try new products and brands, believe in self-service, and either don’t redeem or redeem in smaller volumes.


I am not saying that you need to restrict the timing or the reward options available to your less desirable customers.  There are a few companies that got in trouble by doing this.  I am suggesting that you:


  • Calculate the margin of each customer, including reward costs,
  • Determine your profitable customers,
  • Target only those customers with redemption promotions.


3.     Your redemption process.


TL; DR: Don’t encourage members to redeem if your redemption process is not seamless and easy.


One of the biggest pet peeves of loyalty program members has been the complicated and lengthy redemption processes.  Before you drive more customers to redeem, please evaluate each step involved for a customer, to ensure it is seamless, intuitive, and customer-friendly.


Now that you have found out when you should drive redemption, your next question should be what you can do to encourage it.

1.     Each member’s balance and ability to redeem.


TL; DR: Run spend promotions to build members’ balances or targeted redemption promotions tied to their account balances to ensure they have enough to redeem.


Though it is obvious that customers need to have enough of a balance to claim a reward, we still see mass campaigns advertising them to redeem anyway.  This would be endlessly frustrating to someone who doesn’t have enough in their bank.

Before you run redemption promotions, you need to have balance-building promotions with good bonuses or run targeted redemption promotions with reward suggestions tied to the member’s specific points balance.


2.     Target the reward to the member.


TL; DR: Target the timing and reward options featured to the member’s preferences.


There are typical patterns to redemption behaviour:

  • Some customers redeem at every opportunity for small-ticket items,
  • Some love to treat themselves and use their rewards for infrequent splurges in mass luxury,
  • Some others will never, ever redeem and love to earn endlessly, whereby the growing balance itself is a reward.

You need to time the communication of the redemption promotions with the correct pattern for that member.  Additionally, you must ensure your reward options are of interest and attractive enough for each member.


In summary:  Reward redemptions are a must and a win-win for the company and the member, as long as they are done in a timely and responsible fashion and are targeted to each member’s redemption profile.



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