Redemption rate, also known as burn rate, is the percentage of points given out that have been used to redeem a reward. It is among the most important metrics for tracking rewards program performance, and for good reason. At a high level, redemption rate tells you to what degree your customers are engaged with your program.
Determining your redemption rate is quite easy. Simply divide the number of points spent by customers on a reward by the total number of points that have been issued. Also, be sure to wait at least 6 months before attempting to evaluate your redemption rate. Our research saw inflated redemption rates in the first few months of a program.
The Average eCommerce Redemption Rate
Based on our analysis of 15,000 online stores using Smile.io, the average rewards program has a 13% redemption rate.
But you want to know if your program’s redemption rate is healthy, not average. In order to know if you have a healthy redemption rate we need to look at the top and bottom quarter of our redemption rate distribution.
A Healthy Redemption Rate is Between 13% and 32%
The top quarter of programs have a redemption rate of 32% or higher. If we use the range between our average and the upper quarter, we can establish the healthy range for redemption. Here at Smile.io we set 20% as a great mark to aim for.
If your current redemption rate falls outside this healthy range, your program may have some hidden (or not so hidden) issues you can address. When your redemption rate is low, your members are likely not very engaged. If your redemption rate is high, you may be giving away unnecessary margin.
What If My Redemption Rate is Lower?
There are a variety of reasons you could be experiencing low redemption, but it normally comes down to your rewards design or your rewards marketing.
Rewards design refers to the value proposition of your program. This can include things such as the value of points, program format and diversity of rewards. Program issues at this stage result in a disengaged customers and a redemption rate in the single digits if not zero.
Rewards marketing is all about reflecting on your existing communication channels, including you rewards explainer page, email marketing, and visual display of rewards on your online store. Low engagement at this stage is due to customers not understanding your program, not knowing their point balance, or being unaware of new rewards opportunities.
How Do I Increase My Redemption Rate?
Take rewards beyond the coupon by introducing a variety of rewards options. Doing so will increase the perceived value of your rewards program and will cast a wider net to attract program members. Some will value product discounts and free shipping, while others will prefer experiential rewards that deliver exciting opportunities and adventures.
Members see value in your points when they feel the positive emotions of getting a reward. Your goal is to get them to feel those emotions early. Try creating an easy to achieve but low (monetary) value reward to get people started.
Who said email is dead? In a 2016 survey U.S. retailers, 80% indicated email marketing as a key tactic for customer retention. Clearly consumers aren’t in any hurry to give up the platform. When it comes to your redemption rate, there are a number of email marketing tactics that can help boost program engagement:
- Points balance emails to remind customers of the value available to them
- Birthday rewards emails to show your appreciation for their business
- Incentive emails to promote bonus points events and other promotions
Most customers participate in a number of rewards programs, so sending that little nudge via email can be enough to motivate a repeat purchase.
What If My Redemption Rate is Higher?
For the most part, a high redemption rate is a sign of high engagement and a happy customer base. Nonetheless, if your redemption rate is far above the 13-32% range it could be a sign of poor program design where rewards are too generous or too easily earned. If high reward redemption is severely cutting into your bottom line over an extended period, it could be time to redesign your program.
How Do I Decrease My Redemption Rate?
Decrease Redemption Value
Redemption value is essentially the value of your points in terms of money-back (use this handy little guide to figure out the redemption value of your points). Say you’ve determined that 1 point in your program is equivalent to $0.30 and that you give 1 point for every dollar spent. That means you’re delivering 30% cash-back on every purchase. You’ll run into cash-flow issues pretty quickly if you’re margins are near or below that cash-back ratio.
This is a really tough situation to be in since your generous rewards program could be the reason you have such an engaged customer base. While it isn’t pretty, you have to decrease your points value in these situations or risk running yourself out of business.
Introduce a VIP Program
In order to soften the blow of decreasing your redemption value, consider launching a VIP program alongside the change. A VIP program is a tiered rewards program where customers who earn a certain amount of points “level-up” to a higher tier with greater benefits.
You may still have to decrease your redemption value significantly, but a VIP program would allow you to retain a certain degree of generosity. The core idea of this VIP strategy is to remain generous to those who exhibit the greatest degree of loyalty and provide the most value, while challenging others to reach this exclusive status.
Finding the Right Redemption Rate For You
Remember—you’re in control. Building a program with a strong redemption rate comes down to understanding your audience and executing a program design with laser sharp focus. No two customer bases behave the same way. In fact, redemption rates differ across geography and industry!
Keep in mind that there are some small changes that deliver huge gains to your redemption rate. You can read all about them in our redemption rate research paper: