Whether you are starting a loyalty program or already have an established one, you need to know how much your loyalty points are worth. If you don’t know what loyalty points are worth, you will have no idea how much money you are giving customers in the form of points. In this case, ignorance is not bliss.
It is very important to remember that points = money! When you give a customer points, you are providing them value with an associated cost. The problem the value of points aren't as immediately clear as a dollar off or percentage off coupon.
In this article, we will discuss how to determine what points are worth and how to set point values for key customer actions. You want to incentivize actions without overpaying. Let’s get into it.
Calculating the Redemption Value of Points
Your redemption value is the “money value” your points hold. Essentially, it is the value of your point currency. As a very basic example, say you only allow customers to redeem points for a $10 discount when they accumulate 1000 points. You would divide your reward ($10) by the amount of points required (1000) to see that your redemption value is 1 cent.
(Make sure you're tracking the right loyalty metrics with our free guide)
This would mean that the value of your outstanding points would be the total points multiplied by 1 cent. You can also look at your redemption rate (how many points are redeemed) to get a better estimate of how much money is outstanding in points.
Perceived vs Actual Point Value
Your points actually hold to different values. There is the value that your customers perceive them to be worth and the actual value (redemption value) they hold.
Say you decide to offer exclusive merchandise as the reward in your loyalty program. This means that points are seen as holding value equal to the value of that product in the eyes of your customer. If the product would normally be sold for $20 but can instead be purchased for 2,000 points your points will appear to look like they are worth 1 cent each.
However, maybe that product includes your regular margin in it, and the product only truly costs you $7. In this case while your customer perceive your loyalty points to be worth 1 cent they actually only have a value of 0.35 cents.
When points have a higher perceived value, it allows you to use them as an effective motivator while also keeping program costs down. You get the best of both worlds.
How Many Points Should You Give to Your Customers?
1. Determine the Point Value of Purchases
The most basic functionality of a loyalty program is to reward customers for making a purchase. They give you their business, and you give them a percentage back as points to stay loyal. The amount you give is up to you, but here are some recommendations.
The easiest way to set what points are worth for purchases is at 1% back. This has become a standard for points based loyalty programs, and has proven to be effective.
You should, however, do some research into what is standard in your industry as well as what your biggest competitors are doing. If your competition has a 3% back program, yours will not look nearly as appealing.
2. Determine the Point Value of an Action
One of the main benefits of an online loyalty program, like those built with Smile.io, is that you can award points for customer actions that help your store grow. You can incentivize customers to register for an account, refer friends, or even for sharing your store on social media.
The ability to reward customers for profitable actions is great, but how much should you be willing to pay?
Every store is different, which makes giving an exact value difficult. What you should do is take a look at your customer data to determine what you should offer for different actions. Let’s take a look at rewarding a customer referral.
Imagine the average order value of a new customer is $50. You should be willing to give up to $50 worth of points to incent that referral, but only if you reward points after the referred person makes a purchase. This strategy is on the extreme end, so I would recommend a more conservative approach.
If you are like the majority of ecommerce stores out there, you currently run an Adwords campaign to attract potential shoppers to your store. You can look at your Adwords data and determine your average cost per acquisition (CPA) and set your referral rewards to be equal or even slightly less than that.
Always try to set the quantity of points rewarded for an action based on the value that action holds to your store. For example, a social share is worth less to your store than a referral, since a referral is more likely to create a new customer.
3. Converting Dollar Value to Point Value
Now that you have determined how much an action and purchase are worth to your store, you can now convert that dollar value into points.
Say you want to reward your customers the equivalent of $5 for referring a friend. You know that your points are worth 1 cent each so that means that you would reward you customers 500 points for referring a friend. Simply use the calculation above to discover the point value of the desired reward you wish to offer.
What are Loyalty Points Worth?
As you can see, determining the value of loyalty points is not so black and white. The value of loyalty points is completely up to whoever is organizing the program and can be adjusted to accomplish each stores' individual goals.
I would start with 1% back on purchases and having points be equal to 1 cent each. This is easy to start and is easy for your customers to understand. A simple program is often the most effective at launch.
If you are still assessing whether a loyalty program is a good fit for your program you can take our free loyalty program assessment to help you find out.