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  • Writer's pictureAjay Row

The Math of Loyalty Programs - Part 2 : Rewards / Currency

This is the second of what I hope will be six articles in all. It is a continuation of my previous article on The Math of Loyalty Programs. In this one, I will cover Rewards / Currency and very briefly Earn, which is one of the four levers of loyalty. Articles 3 to 5 will describe the other levers. And in the sixth article, I plan to pull together thoughts from each of these to demonstrate how the math of loyalty really works.

To help build our collective understanding, please do comment, correct and embellish. This will help us all understand our field better.


A loyalty currency is a commitment to pay a member of a loyalty program for "desired actions" via a "reward" which is transferred through a "redemption".

Typically a meaningful reward is available only after a number of desired actions have been taken thus ensuring the member is disproportionately profitable for the company before any money goes out by way of a reward. The desired action usually results in members spending money on or saving money for the company. In some imaginative programs it goes beyond that, for instance, rewarding potentially habit-forming behavior.

The currency is typically branded points or miles though other measures are not uncommon.

If not redeemed, the promise of a reward "expires" along with the points or miles. This is called "breakage". Some folks, CFOs as a frequent case in point, think breakage is a Good Thing. It allows for loyalty liability to be written back to the P&L as a profit and revenue to be recognized. Well, no, it isn't. It merely means the company went through all the effort of creating and running a program to create a currency that at least some members no longer care about; and remember these are folks who at some stage wanted to be loyal. From there to not caring about the brand is but a small step. This is not to say some amount of breakage is not expected, members do move, die or otherwise disappear, it just that setting up a program such that the bulk of points break is breathtakingly short-sighted.

In fact the critical thing about a loyalty currency is to make members care about it. For this the rewards need to be attainable is a realistic time-frame and have some meaning for the member. The rewards need to be items or services that he or she would want and can realistically have. Airline miles for instance, are often more valuable than an equivalent in cash -- it is a fascinating dynamic how much members can care.

One of the smarter ways to add disproportionate value to the currency is via the difference between the member-perception of Value Per Point at redemption and the company's actual Cost Per Point. A program that plays the VPP/CPP equation well appears to give away a lot, while it actually costs little (example: airline frequent flier miles or hotel nights -- an empty seat or room costs little incremental cost to fill, but the reward is perceived to be as valuable as the price quoted publicly).


What works best as a reward? There are many types of rewards but a good starting list includes:

1 Dream rewards that members will "save" points, sometimes for years, to earn; the gain must be worth the time and money spent. The list of dream rewards includes vacations, consumer electronics and much else besides. These items need to look good in the redemption catalog and be at least as good or even better when consumed. Dream rewards are high-risk, for many reasons, not least that they have to sit on the catalog for a long time with little control over prices, but also because a dream reward often means reducing member point balances to (near) zero. This is risky. But the pay-off in terms of member commitment can be really high-gain.

2 Little treats are just that. A little something that can be done on an impulse that makes a member's day better. The list includes mobile recharges, movies and entertainment, discounts on purchases and so on.

3 Discounts or more of the same. Airlines offer flights, hotels offers meals and roomnights, retailers offer more shopping. More of the same are perhaps the most common form of redemption and hence best understood but they must be treated with caution. You can't always assume the product you have is the one your member wants, especially for products and services purchased on other people's money (e.g. hotels and tickets while traveling on work).

4 Real-time-redemption. Typically offered by card companies or retailers, RTR is a special case of discount or more of the same. Not a great way of earning never-dying loyalty but then again, it can be used to cleverly offer a discount on someone else's service rather than the company's own. The fear of RTR is that though it seems so cool (think of the convenience) it can rapidly reduce to being a discount mechanism.

5 Points + cash. Another special case of discounts and more of the same -- basically the member pays cash to "top up" his or her points balance resulting in getting better value from the program earlier than latter. Played well, this instrument can deliver disproportionate value to the member and also, in the process, the company.

6 Catalogs etc. Redemption rewards are advertised in may ways, a catalog, paper or electronic, of goodies is one. Another, often neglected is a reward communicated to the member one-on-one, typically from outside the catalog, available only for a short period. These redemptions work to build both recognition (member thinks he or she is special) and value for the currency (can be an opportunistic deal that is partially passed on to the member). When effectively targeted they work very well in building loyalty -- i.e. members vulnerable to attrition can be the first of the list who get the offer. Another way of building an inexpensive reward redemption is driving a brand trial as a redemption item. Brands often have a large marketing budget to drive a new launch, trials are golden. This can be leveraged on behalf of the program, the member and of course the beneficiary brand.


A critical part of the equation is of course how the currency is earned in the first place. Briefly, any profitable behavior is deserving of points earned. But the idea is that the behaviours rewarded are profitable. To ring-fence themselves, airlines and hotels discriminate based on the "rate code" used, few retailers will offer points during the EOSS. The thinking behind the earn strategy is complex and beyond the scope of this brief note. But they are critical, programs and even companies are made or broken on the basis of their earn and expiry policies. If you need some advice for your industry, please ping me directly. I will certainly help you if I can.

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