Loyalty experts often say “points are money.” This reminds us that loyalty programs are not just simple platforms for exchanging points. They are more like banks, but with points as the main form of currency.
For customers, points are just an added bonus, which create the opportunity to earn discounts or rewards in the future, but for a program operator, points are a financial liability. Points Value Strategy is a fundamental stage during a loyalty program designing process, in which program operators must define how members accrue points as well as how they can redeem them. For now, we will focus on the redemption side, as it has a more significant impact on the real value of points.
Loyalty points in the redemption process
The program operator sets the ‘price’ in points for each reward. This approach allows them to manage the value (and costs) of the entire program. A loyalty program should offer a selection of gifts in a catalog that members perceive to have high value. But usually, the price of a given reward is much higher for customers than the wholesale purchase price paid by the company.
How does the customer calculate the value of loyalty points?
The regular market price for a given reward is 100 EUR. The same item is available for 2000 loyalty points. To gather enough points, the customer has to spend at least 2000 EUR on purchases (assuming that for each 1 EUR, he or she gets 1 point). If the member calculates the value of the reward, he or she will divide the known price by the required number of points.
From the member’s point of view, the loyalty points are worth 5% of the money spent.
How does the program operator calculate the value of loyalty points?
Let’s look at the same example from the loyalty program operator’s perspective. In this case, the price of the reward is lower, as the operator purchased it for 50 EUR in wholesale.
It seems that for the company, the points are worth 2.5% of the transaction income.
As you can see, there is a 2.5% margin on a given reward. It is a profit for the operator, which gives them flexibility in reward catalog management. He can adjust the number of points to make sure the perceived value of the gift is higher than the actual price.
The topic of loyalty points strategy is important, as it is a key factor of the loyalty program ROI.
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