Using points as the loyalty currency has a number of advantages. Points are:

• Easy for the customer to understand
• Flexible for both issuance and redemption
• Adaptable to multiple retailer needs

 Why loyalty programs work

There is proven psychology behind why a currency like loyalty points is effective:

• Collecting as a motivator: Human beings have always liked collecting things—be it stamps, butterflies, rocks, cards, or points. We get a dopamine hit from collecting and seeing our balance increase. This innate behavior taps into our desire for completion and organization.
• The theory of medium-maximization: People will focus on the medium itself (i.e., the points) not just the outcome (i.e., the rewards), and we get a sense of achievement in seeing the medium itself grow (even before those points are redeemed). Retailers can leverage this tendency by showing customers their progress through dynamic loyalty dashboards or personalized email updates.
• The progress effect: People like achieving goals, and the closer we get to a goal, the more motivated we are to complete it (also called the goal-anticipation effect). Seeing points accumulate motivates us to keep collecting. Retailers can amplify this by offering incentives such as bonus points when customers are within reach of a reward.
• The ego and status effect: Building up a points balance can boost a customer’s sense of self-worth, especially when they can compare their progress to others. This effect lies at the heart of gamification, loyalty leaderboards, and status tiers, where customers strive for exclusivity and recognition.

By implementing these principles, retailers not only incentivize purchasing behaviors but also build emotional connections with customers, fostering long-term loyalty.

Leveraging the points currency

The basis of most loyalty programs is issuing points for reaching a spend threshold, for example, 1 point for every $20. However, the beauty of points as a currency is that they can be used to incentivize and reward all kinds of behaviors. The very best loyalty programs recognize this. They use points as both a promotional and relationship mechanic.

Innovative Ways to Issue Points

Common examples include:

• Recognizing special events: Issue points for birthdays, anniversaries, or even seasonal celebrations. A small bonus during the holiday season can feel like a personalized gift and encourage customers to shop more.
• Encouraging engagement: Thank customers with points for completing a survey, updating their profile, or sharing user-generated content on social media. This turns loyalty into a two-way conversation.
• Promoting value-added transactions: Offer points for signing up for a subscription or purchasing extended warranties. These transactions provide immediate value to the retailer while rewarding customers for commitment.
• Recovering service mishaps: Use points as a goodwill gesture to resolve customer service complaints. This not only appeases dissatisfied customers but also strengthens their relationship with your brand.

Strategic Points Promotions

One of the most effective ways to use points is for points-based promotions. These provide a great alternative to discounting, usually at much lower cost or margin offset.

Some of the most common forms include:

• Multi-point promotions: Double or triple points during slow sales periods or for specific categories. For instance, a bookstore could offer double points on children’s books during back-to-school season.
• Product-based promotions: Bonus points for purchasing specific products can help move inventory, promote new lines, or feature co-branded collaborations. This is especially useful for products with high margins or limited appeal.

Segmented promotions are another layer of strategy, enabling businesses to target specific customer groups with personalized offers. For example:

• Winning back past customers with double points on their next visit.
• Rewarding high-value customers with exclusive bonus opportunities to make them feel special.
• Introducing customers to new products or services with targeted promotions based on purchase history.
• Upselling “next-best” customers with higher point offers for larger purchases.

Don’t forget redemption

While earning points is crucial, redemption is equally important in creating a meaningful loyalty experience. Without enticing and attainable rewards, customers may disengage from your program.

Expanding Redemption Options

While most loyalty programs today focus on points earned equating to a certain level of discount (e.g., earn 100 points and get 10% off or earn a $5 voucher), points can also be converted into other rewards:

• Product and gift-based rewards: Offer curated or limited-edition rewards that elevate the customer experience. This approach works well for brands looking to move inventory while reinforcing their image as generous and exclusive.
• Prize draws: Use points as entries into sweepstakes for high-value or unique experiences. For instance, a fitness brand could offer a chance to win tickets to a local marathon or a virtual session with a personal trainer.
• Experiential rewards: Redeem points for VIP experiences like early access to sales, member-only events, or workshops. These rewards build a sense of community and exclusivity.
• Premium services: Allow customers to use points for perks like free shipping, extended warranties, or subscription upgrades.

Best Practices for Redemption

To maximize the impact of your redemption strategy:

1. Create a reward variety: Offer rewards at different point levels to cater to all customer types, from casual shoppers to your most loyal fans.
2. Simplify the process: Make it easy for customers to understand how to redeem points, whether through your app, website, or in-store.

Communicate often: Use email and SMS marketing to remind customers of their points balance and encourage redemptions before they expire.

Measuring loyalty program success

To ensure your loyalty program delivers maximum impact, track key metrics such as:

• Redemption rate: The percentage of points redeemed versus points issued. A low rate may indicate disengagement or unclear redemption options.
• Customer retention rate: Measure how your loyalty program influences repeat purchases.
• Average order value (AOV): Compare spending habits of loyalty program members versus non-members.

By analyzing these metrics and fine-tuning your program, you can create a loyalty strategy that not only boosts engagement but also drives long-term revenue growth.

Final words

The common theme across all these examples, on both the issuance and redemption side, is that the loyalty currency—the loyalty point—is being utilized to drive a range of behaviors, strengthen the relationship with the customer, and drive higher engagement with your loyalty program. The higher the levels of engagement, the more the customer will value the program and the higher the loyalty benefits for the retailer.

And at the end of the day…that is the point!

About the author

Lance Walker has spent 30 years working in loyalty programs and marketing. He is the former CEO of Loyalty New Zealand, which operated the Fly Buys loyalty program, and has served as Managing Director of two leading direct marketing agencies. Lance also founded and ran a specialist customer relationship marketing consultancy.

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Published Feb 5, 2025 11:35:14 AM