Whether you are thinking about 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 that has an associated cost. The problem is it is not as straight forward 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 incent actions without over paying for them. Let’s get into it.
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 to get it (1000) to see that your redemption value is 1 cent.
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.
Determining 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.
Determining the Point Value of an Action
One of the main benefits of an online loyalty program like Smile.io’s is that you can award points for customer actions that help your store grow. You can incent customers to register for an account, refer friends, even for sharing your store on social media.
The ability to reward customers for actions that are profitable to your store 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.
If you know that the average order value of a new customer is $50 than you hypothetically should be willing to give up to $50 worth of points to incent that referral. As long as you are only rewarding points when the referred person makes a purchase. This strategy is on the extreme end and 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.
When setting the points you will reward for an action you should always try to set it based on the value that action holds to your store. A social share is worth less to your store than a referral and the points you award for each should reflect that.
Converting Dollar Value to Point Value
Now that you have determined how much an action/purchase is 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 what loyalty points are worth is not as black and white as it may appear from the onset. The value of loyalty points is completely up to whoever is putting together the program and can be adjusted to accomplish each store’s 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.