Editor’s Note: This post was originally published in December 1, 2017 and was updated for accuracy and comprehensiveness on December 13, 2018.
Whether you are starting a new loyalty program or already have one, you need to know how much your loyalty points are worth. This information is what allows you to clearly show your customers the value of belonging to your rewards program. If you don’t know what your loyalty points are worth, you will have no idea how much money you are giving customers, and they won’t either!
When you give a customer points, you are providing them value with an associated cost. The problem is that the value of a point isn’t immediately recognizable as a specific amount of money or percentage off.
I’m going to teach you how to determine what your program’s points should be worth, and how to decide how many points should be awarded for key customer actions without overpaying. Let’s get to 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 converted into dollars
Let’s say you allow customers to redeem points for a $10 discount once they have accumulated 1,000 points. You would calculate your redemption value by dividing your reward ($10) by the amount of points required (1,000). This would show you that your redemption value is 1 cent.
By multiplying your point value by the total number of outstanding points , you can see the value of all the points your customers currently have in their possession.. . Additionally, you can use your redemption rate to get a better estimate of how much money is outstanding in points.
The difference between perceived and actual point value
Even though calculating the redemption value of your points is important, it’s only one side of the coin (pun intended). You also need to consider the value your customers perceive your points to to be worth, which is not the same as their actual value.
A good way to illustrate this idea is with free product rewards. Say you decide to offer exclusive merchandise as a reward in your loyalty program. Customers will perceive that their points hold the same value as the product they are redeeming for. So if the product would normally be sold for $20 but can be purchased for 2,000 points, it will look like your points are worth 1 cent each.
However, if that $20 product includes your regular margins in it, it may only truly cost you $7 to produce. In this case, while your customer perceives your loyalty points to be worth 1 cent each, 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 that not only provides value to your members but also keeps program costs down. In other words, you get the best of both worlds!
How many points should you give to your customers?
Step 1. Determine the point value of purchases
Reward programs are designed to help you build your brand community by rewarding customers for joining, engaging with, and sharing your community with others. While there isn’t a point value that is optimized to help every business motivate community building, there are a couple things to consider.
Based on our experience, offering 1% back is a fairly standard place to start for points-based loyalty programs. It’s proven to be not only effective but also easy for customers to calculate and understand on their own.
That being said, you should always do some research into what is standard in your industry, as well as find out what your biggest competitors are doing. If your competition has a 3% back program, yours will not look nearly as appealing if you only offer 1%.
Step 2. Determine the point value of an Action
One of the main benefits of an online loyalty program like the ones you can build with Smile, is that you can award points for customer actions that help your brand community grow. These actions can include registering for an account, referring friends, or even sharing your store on social media.
When it comes to determining how much each action is worth, the first thing you should do is take a look at your customer data. Data driven insights can help you determine what to offer for different actions.
Take referrals, for instance. Imagine the average order value of a new customer is $50. If you wanted to break even, you would need to be willing to offer $50 worth of points to incentivize each referral, but only if you reward points after the referred person makes a purchase.
There’s more to a rewards program than just breaking even, though. One of the key benefits of building a community with rewards is breaking away from the illusion of growth. If you know what your historical cost per acquisition is, you can set your referral rewards to be slightly less than that. This will keep every referral valuable for both you and your customers.
You can apply this same line of thinking to determine the value of other customer actions. A social share should be worth less than a direct referral, since a referral is more likely to get someone to join your brand community and become a customer. For example, if you would typically spend $1 for a couple hundred impressions from a promoted Facebook post, you should be willing to offer $1 worth of points for a share on that social media platform, since most people have around 155 Facebook connections.
The key is knowing the customer acquisition cost for your different channels. With that information, you can calculate what those actions are worth for your brand and determine how much value actions should give your members!
Step 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, and you know that your points are worth 1 cent each. That means that you should reward you customers 500 points for referring a friend.
You can use the calculation above to determine the point value you wish to offer for different engagements with your program. All it takes is 3 steps!
What are loyalty points worth?
As you can see, determining the value of loyalty points is an incredibly important part of designing a rewards program. At the end of the day, the value of your loyalty points is completely up to you, and can be adjusted to accomplish each brand’s individual goals.
To get started, I would offer 1% back on purchases and set your rewards up so that points are worth 1 cent each. This is easy for your customers to understand, making it the perfect amount to start with.
Remember: a simple program is often the most effective, so don’t overthink it!