Loyalty rewards management: an expert guide with best practices

To ensure the success of your loyalty program, you should carefully select rewards that meet and exceed your people's expectations and needs. The cornerstone of a thriving loyalty program lies in its ability to offer various rewards. This range can include options like physical presents, gift cards, cash back, the flexibility to pay with points, multiple coupons, attractive discounts, options for charity donations, complimentary products or services, and exclusive access to special events or products. Such a diverse selection caters to different customer preferences, enhancing the appeal of your program.

This guide provides an in-depth look at the most successful and popular global rewards brands implement in their loyalty programs – it's a practical resource for refining your strategy and elevating your loyalty program.

About the specialist author

Paweł is a marketing and loyalty expert with 20+ years of experience in building loyalty programs. Formerly a Loyalty Manager at BP, involved in implementing successful rewards programs at multiple BP locations across Europe.

Key takeaways

Effective loyalty program management hinges on strategically balancing enticing rewards with economic viability. Tailor rewards to meet client expectations, address inventory shortages, and regularly update catalogs based on feedback. Implement a points-for-rewards system with financial provisions, and stay vigilant on legal and tax implications for long-term success.
Loyalty programs offer a variety of rewards, including physical gifts, coupon-based incentives, gift cards/prepaid cards, cashback, pay with points, and the option to make charity donations.
To foster lasting customer relationships and boost loyalty, implement a customer-centric rewards program by offering personalized experiences, exclusive access, complimentary services, and versatile rewards. Additionally, make a meaningful impact through philanthropic options and provide tangible, memorable rewards for a satisfying and connected experience.

What's important in managing loyalty rewards?

First of all, recognize that rewards are the linchpin of customer engagement and long-term retention – your strategy should focus on offering rewards that are both enticing to people and economically viable for you. Ensuring these rewards are accessible within a feasible timeframe is crucial for sustaining interest. The use of advanced customer loyalty software can assist in efficiently managing these aspects.

Your scheme should cater to the specific expectations of the target audience. Rewards must be priced in the program's currency, striking a balance between desirability and attainability for active loyalty program members. Utilizing loyalty management software can help in setting these parameters effectively.

Addressing shortages of in-demand gifts, both physical and digital, is another significant part of effective product management. Maintaining a well-stocked inventory and ensuring electronic codes are always valid and functional is essential. Consider the production and availability timelines for physical gifts, particularly during promotional periods. Transitioning to online catalogs and mobile apps can offer greater flexibility and cost-efficiency, though it's essential to consider the preferences of all customer segments, including those who may prefer traditional paper editions. Implementing customer loyalty program software can facilitate this transition smoothly.

Regular updates to your rewards catalog based on feedback and trends are crucial for program improvement. Monitor loyalty program metrics such as redemption rate – a high rate indicates a firm offer, while a low rate could signal that rewards are perceived as either too ambitious or unappealing, potentially leading to disengagement. By analyzing customer behavior, you can make informed decisions about your go-to-market rewards catalog.

Incorporating a points-for-rewards system guarantees you have adequate financial provisions for reward redemption. Typically, this involves reserving a fund that covers the cost of the market value of active points, adjusted for the redemption rate. Using loyalty management solutions can streamline this process.

Finally, stay abreast of the legal and tax implications related to your reward mechanisms. Due to the dynamic nature of regulations, ensuring compliance and adaptability is vital for maintaining the program's integrity and appeal. Your understanding of these areas will significantly influence the success and sustainability of your loyalty program. That's why employing comprehensive customer loyalty software can help in navigating these complexities.

Six basic types of rewards in loyalty programs

Customer loyalty programs are a strategic tool companies use to encourage buyers to re-engage and increase brand loyalty. These programs offer various rewards as incentives for continued patronage and interaction with the brand.

Below, you can find some basic types of rewards that are commonly integrated into loyalty programs.

1. Physical gifts

This type of reward involves tangible items given to customers as a token of appreciation for their affinity. Physical gifts are often tiered, with more valuable items offered to members with higher loyalty or points.

These can range from goods like backpacks, water bottles, and phone accessories, or to more high-end options such as tech gadgets, kitchenware, or even luxury goods – all with your brand logo. Examples of physical loyalty gifts include:

In-store rewards

These are gifts that people can obtain directly from physical locations. The key here is to strike a balance between affordability and appeal. Typically, these rewards are of lower value but still attractive, such as a thermal mug with the company's logo. Other examples of such tangible rewards include branded merchandise like t-shirts, keychains, or eco-friendly tote bags. These items serve as tokens of appreciation and act as practical marketing tools, spreading brand awareness wherever they go.

Home-delivered prizes

These are higher-value rewards that are ordered and shipped directly to the person's home. An example would be a tablet, electric kettle, sets of pots, pans, coffee makers, high-quality bedsheets, or knives. This type of gift is generally more substantial and serves as a significant incentive for customer loyalty.

An example here could be Ideal Boilers and Wolseley, which announced Oliver Ilines, a London-based plumbing and heating engineer, as the winner of their "Epic Giveaway." The giveaway, tied to purchases of Ideal Logic Max or Vogue Max boilers at Wolseley branches from September to December 2019, awarded monthly winners Love2Shop vouchers, leading to Oliver's grand prize of a £40,000 package. This prize included a customized VW Transporter van with boilers and tools.

Home-delivered prizes example. Source: https://www.hvpmag.co.uk/London-installer-takes-home-40000-Ideal-Boilers-and-Wolseley-prize-bundle/12026

Personalized prizes

These items can be personalized with personal details collected along the way, adding a unique touch to make the gift more special and memorable.

Picture a vintage compass custom-engraved with coordinates of a significant place in their life, personalized jewelry for those who appreciate elegance, or a tailored clothing item bearing their names. For connoisseurs, elevate their drinking experience with engraved glassware or barware. Alternatively, create a cherished keepsake for a family of five with a personalized photo album. As you can see, the possibilities are endless, and customization ensures a thoughtful and one-of-a-kind present.

Custom Name Necklace, Personalized Nameplate Necklace, Gift for Her, Christmas Gift, Simple Block Name Necklace, Dainty Necklace - Etsy | Name necklace, Custom name necklace, Custom necklace — Personalized prizes example. Source: https://www.pinterest.com/pin/custom-name-necklace-personalized-nameplate-necklace-gift-etsy--822540319449938803/

Free product samples

Using free product samples is a dynamic marketing strategy that spans various industries. From skincare companies offering trial-sized products to enhance the customer experience to health and wellness expos distributing sample packs and fashion showrooms providing fabric swatches, furniture stores also offer complimentary small decor items for customers to touch and feel. Integrating free product samples is a versatile and impactful way to engage consumers and boost sales across diverse markets.

Customers generally appreciate the immediate gratification of receiving a reward right out of the box, often opting for a small, inexpensive gift. This initial experience of obtaining, unwrapping, and physically handling the gift tends to evoke positive emotions, adding to the perceived value of the loyalty program and reinforcing trust in it.

The nature of reward collection, however, varies with the retail context. In physical retail settings, people usually prefer to pick up rewards at the point of sale. At the same time, in e-commerce or for more expensive gifts requiring home delivery, the process differs. Home delivery of gifts is appealing but comes with the challenge of people's impatience. Every minute a client waits for their gift feels prolonged. For this reason, it's crucial for program managers to strategically choose which gifts are available for immediate pick-up at points of sale and which are suited for home delivery – this decision should consider factors like the gift's cost and size, impacting storage requirements.

Interestingly, not all customers redeem their points for gifts. Some choose to accumulate them, possibly for future use, often leaving them unredeemed. Managing physical gifts within a customer loyalty software is complex and can be approached in various ways, ranging from complete outsourcing of the rewards process to managing it entirely in-house. The latter requires significant effort, especially for companies with retail loyalty programs with multiple locations, as it adds a significant gift management workload.

For stand-alone gift management, several activities need your attention:

Selecting appropriate rewards.
Negotiating favorable terms (financial and return policies).
Handling shortages and damages.
Managing logistics and warehousing.

These challenges are similar to those faced in typical retail scenarios. Separate management of gift inventories also allows for better control over the loyalty program.

A practical starting point is choosing the right gifts that align with the program strategy, customer expectations, and market trends. This involves considering the variety and quantity of available gifts. Conducting surveys to understand priorities can be useful in creating a list of potential products for further analysis.

Once the final list of gifts is prepared, you can begin the negotiations with suppliers. Focus areas during these discussions should include financial terms, delivery timelines, complaint handling, product availability, and the production duration of specific models. Avoid situations where shoppers cannot receive their chosen gift! Collaborating with selected suppliers to refine the final gift offer can be beneficial. Once contracts with suppliers are finalized, you can start preparing to stock the gifts.

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Proper storage is vital – spaces designated for loyalty scheme merchandise should be separate from other goods for efficient location and inventory management. Catalog gifts in the program's warehouse system, which should also track each item's distribution. Bear in mind that handling returns and complaints is also part of the process and should align with the terms agreed upon with suppliers. Additionally, security measures, such as fraud control verification, are necessary to mitigate theft, although complete prevention is challenging. Finally, conduct regular inventory checks to maintain accurate stock levels.

Unfortunately, damage to packaging is inevitable, whether during transportation or storage. That's why your contracts with suppliers should include resolution of such situations, possibly including replacement packaging or additional discounts. A contingency plan for damaged products is also a must, including back-up stock for replacements.

Now, cost planning for gift services is a critical aspect of managing a loyalty scheme and requires a comprehensive approach to ensure financial viability and efficiency. This planning should include five key expense categories:

1. Warehouse expenses:

Rental or ownership costs. Depending on whether the warehouse space is rented or owned, this includes monthly rent or mortgage payments, along with any associated property taxes.
Utilities and maintenance. Costs for electricity, water, heating, and cooling, as well as regular maintenance and repairs to keep the warehouse operational.‍
Warehouse staffing. Salaries and benefits for warehouse staff, including managers, inventory handlers, and logistics personnel.

2. Insurance costs:

Property insurance. To protect against potential damages to the warehouse, equipment, and stored gifts.
Liability insurance. In case of accidents or injuries occurring within the warehouse premises.‍
Goods-in-transit insurance. For protecting the gifts while they're being transported to and from the warehouse.

3. Handling expenses:

Inventory management. Costs associated with managing inventory, including software systems for tracking stock levels, order processing, and inventory audits.
Packaging materials. Expenses for boxes, wrapping materials, labels, and other supplies needed to prepare gifts for delivery.‍
Labor costs. Costs for staff involved in picking, packing, and preparing items for shipment.

4. Transportation expenses:

Delivery costs. Fees paid to couriers or shipping companies for delivering gifts to customers or transporting them between locations.
Vehicle maintenance and fuel. If the company owns a delivery fleet, costs for maintaining vehicles and fuel expenses.‍
Driver salaries. Wages for drivers if the company uses its own delivery personnel.

5. Contingency planning:

Emergency warehouse shifts. Funds allocated for sudden relocations or shifts in warehouse operations due to unforeseen circumstances, such as natural disasters or lease terminations.
Unexpected increase in shipping costs. Budget reserves for scenarios where shipping costs rise unexpectedly due to factors like fuel price hikes or changes in carrier rates.‍
Stock shortages or overflows. Resources set aside to manage unforeseen inventory challenges, like needing to quickly acquire additional stock or handle excess inventory.

In addition to these categories, cost planning for gift services should also consider long-term strategic investments, such as technology upgrades for warehouse management systems or investments in more efficient packaging solutions. These investments, while initially costly, can lead to significant savings and improved efficiency over time.

Managing surplus stock from promotions is another aspect. While well-negotiated return policies with suppliers can help mitigate costs, they're unlikely to eliminate them entirely. Maintaining adequate inventory at points of sale is essential to ensure customers can always claim their desired rewards. Consequently, when updating the rewards catalog, some excess stock may remain, not all of which can be returned to suppliers.

These insights into gift management within a loyalty scheme are intended to provide a foundational understanding before initiating a program and making reward decisions. Considering the complexities involved, outsourcing the entire gift management process to a specialized company might be a viable option, allowing for more efficient handling of these program functions.

Physical gift advantages

The possibility to change the value of a point (the margin on the product may differ from the final price in points to make selected, allowing users to make prizes more attractive for select items).
Greater customer confidence in programs with real prizes and an excellent incentive to collect points, even for expensive prizes. Additionally, adding photos to prizes increases interest in the program.

Physical gift disadvantages

High costs (negotiations, logistics, warehouse, damage).
Logistical challenges (shortages, packing, loss, storage).
Inventory and ordering challenges.
Fraud challenges.
Challenges with complaints and returns.
Problems when the offer changes.
Problems with leftovers after the promotion.

Example: Mastercard gifts catalog

Customers often prefer physical gifts as rewards, finding them more desirable. Despite their popularity, managing and implementing physical gifts can be complex and often entails higher costs. Nevertheless, the impact of a tangible gift delivered directly to the customer's door is significant, as they can physically interact with and utilize the item. It's essential to carefully weigh the allocation of physical rewards against alternative options in your reward strategy, such as discount codes and digital products.

Source: Mastercard gift catalog as an example of physical card rewards. https://loyaltygateway.com/rewards/phoenix/mcr1/shop/11578?postaction=initActionShopCatalogDetail&csrf_token=35ti7q8fkgse

2. Coupon-based rewards

Discounts in various formats, such as QR codes, barcodes, and vouchers, are key components of loyalty programs. These discounts can be utilized for a one-time discount or special offers on future purchases. The inclusion of QR and barcodes introduces a digital aspect, simplifying tracking and redemption for both businesses and participants. Meanwhile, vouchers, whether physical or digital, offer a specific value or percentage discount on products or services.

Among the different reward types, electronic codes accessible through apps or websites prove to be the most effective for loyalty schemes. The immediacy of these codes allows recipients to quickly grasp the program and enjoy their rewards. Despite potential challenges such as monitoring code stock, negotiating offers, or outsourcing management, electronic codes stand out as the most efficient method for rewarding customers in loyalty programs.

The flexibility of electronic codes empowers program managers to enhance customer loyalty through various means, whether implementing low-budget surprises or offering substantial rewards for valuable clients. Electronic code rewards can be strategically delivered at key moments, creating delightful surprises for recipients. Nonetheless, the lack of logistical costs and the ability to deliver rewards quickly, often through email, make electronic codes more advantageous than physical gifts.

Examples of coupon-based rewards

Coupon-based rewards attract new customers and also foster loyalty among existing ones. Examples of coupon-based rewards include:

Rewards in the form of codes with a perceived value (e.g., cinema tickets).
Rewards in the form of discount codes (e.g., 20% discount redeemable at restaurant X).
Rewards in the form of codes with a tangible value (e.g., $5 for purchases at a particular retail chain).
Rewards in the form of a subscription code (e.g., Spotify subscription).
Rewards based on specific services (e.g., free delivery, online training).

Codes with a perceived value

The most favored and user-friendly rewards for customers are electronic codes with a clearly defined value, such as cinema or theater tickets. These codes typically have a short expiration period, often around seven days. The advantage lies in the clients' ability to easily verify the value of the reward by comparing it with standard price lists, which provides a high level of transparency.

From the organizer's perspective, these rewards are cost-effective as they're likely obtained at a significant discount, drastically reducing the cost per point in the loyalty program. Additionally, there are minimal logistical and warehousing costs associated with these rewards, requiring only minor system adjustments – codes must be readily available in sufficient quantities, and any potential technical issues must be resolved on the fly.

Another category worth noting is the so-called "Money can't buy" gifts based on electronic coupons. These exclusive offerings are unavailable for retail purchase, making them unique and desirable. Examples include special events like dinners with celebrities, co-driving experiences with rally drivers, or closed chamber concerts. So, while money can't buy happiness, apparently it can get you a front-row seat to a concert in a closed chamber.

These events are often organized by third-party companies and purchased by the loyalty scheme organizer to offer an extraordinary experience to their customers. Alternatively, the organizer may provide exclusive access to in-house events, limited-edition gift collections, or special privileges, such as early access to fashion shows or pre-sales of collections. These rare and exceptional rewards are highly sought after by customers, providing them with a sense of uniqueness and exclusivity.

Example of a code with a perceived value. Source: https://www.youtube.com/watch?v=lI5Jn2M735g

Discount codes

Discount codes, akin to the previous gift group, offer tangible incentives for customer engagement. During sales events, these codes apply discounts to retail prices, often used in barter activities between companies. Accessible to customers at a nominal cost, they lower the program organizer's cost per point.

For instance, loyalty program participants can use their points for exclusive 24-hour flash sale discounts, gaining an extra 15% off during limited-time offers. Collaborations with partner brands also yield unique discount codes for 10% off partner products.

High discounts, like 20%, encourage shopping but are designed for high-margin products. Carefully calculate offers, check for similar deals, and consider time limitations. Tiered discounts, seasonal promotions, and product bundles can be compelling. Additionally, personalized birthday discounts, limited-time offers on clearance items, and referral program incentives further enhance the appeal of discount codes in loyalty programs.

Example of a discount code. Source: https://www.al.com/bargain-mom/2011/03/old_navy_30_off_printable_coup_2.html

Codes with a tangible value

This type of electronic value code is equally popular compared to a percentage discount. In this scenario, people are given a set monetary value to spend, usually starting with a minimum purchase, like $25, to protect a minimum margin. Despite the similarities to percentage discounts in terms of cost and time constraints, the key difference lies in the perceived value to the customer – having this code gives a sense of tangible cash that can be spent at a designated point of sale.

This approach proves more effective than a large percentage discount because individuals are less inclined to "lose" money and are motivated to utilize the assigned value code. Notably, by distributing such codes to customers, there's no loss if the codes remain unredeemed. The benefits kick in when buyers use the codes according to predetermined and secure conditions, leading to increased sales and customer acquisition.

It's important to note that the acquisition of new clients happens through the retailer who issued the codes, not the program operator. Overall, this strategy is a win-win for everyone involved, and retailers should take steps to keep the newly acquired customers on their own.

Example of a code with a tangible value. Source: https://www.pinterest.com/pin/139822763407694617/

Subscription codes

Subscription codes, which unlock access to various services, offer an intriguing reward solution. This model is particularly popular among streaming platforms and online platforms that offer premium features through term subscriptions. By redeeming a modest amount of points, such as 200, users can unlock various rewards. For example, they can enjoy a 6-month subscription to popular services like Spotify Premium, Netflix, or Bloomberg.

This approach is an excellent means for customers to explore a service with a free trial period facilitated by loyalty program points. It's essential to implement clear regulations and restrictions for such offers, specifying both the duration and the limit on the number of times an offer can be utilized by the same customer. To illustrate, loyalty program members can redeem a specific offer only once. This ensures a balanced and controlled utilization of these subscription-based rewards.

Example of a subscription code. Source: https://rewardmobile.co.uk/latest-news/rewards-with-reward-mobile-a-year-of-spotify-premium/

Specific services or access coupons

Another compelling approach involves providing a distinct service to participants in the scheme who fulfill the specified program criteria. This might include providing free delivery for their purchases, engaging them in specialized workshops, or giving them access to exclusive webinars – tailored to your business needs. Your loyal program members will likely greatly value and eagerly anticipate these perks.

While the nature of these services and their perceived value may fluctuate, participants of the loyalty program can enjoy them for a specified, and potentially extended, duration without being affected by changes in the scheme's offerings or pricing.

Example of a specific service or access coupon. Source: https://www.facebook.com/noodlesandcompany/photos/a.10151365339855246/10165747812280246/?type=3

Coupon advantages

Seamless system integration for quick setup.
Effortless online distribution channels.
Convenient redemption anytime through online platforms.
Simple implementation of updates or modifications.
Smooth addition or removal of promotional offers.
Straightforward code management for efficient handling.

Coupon disadvantages

Problems with the POS system, as in the case of incorrectly issued codes.
Printing codes may be required (e.g., issues with a smartphone).
The offer value needs to be verified frequently, especially in the case of service costs.
Higher possibility of fraud activity.

Example: Mastercard e-cert

Mastercard e-coupons, such as those available for restaurants like Papa John's, provide cardholders with a convenient and rewarding method to elevate their dining experiences. Provided by Mastercard, a leader in payment technology, these digital vouchers are versatile and user-friendly, available as either complimentary incentives or as part of paid promotions. Such flexibility caters to a wide range of dining preferences and budgets.

The use of these e-coupons is simple and integrates seamlessly with Mastercard's payment system, allowing users to enjoy exclusive discounts and special deals at participating restaurants.

Mastercard's global reach ensures that these e-coupons are accepted at a diverse array of dining establishments, from local eateries to upscale restaurants. This wide acceptance benefits both cardholders, who enjoy more dining options, and restaurants, which gain increased visibility and patronage.

Mastercard e-coupons to restaurants as an example of coupon rewards. Source: https://loyaltygateway.com/rewards/phoenix/mcr1/shop/11578?postaction=initActionShopCatalogDetail&csrf_token=35ti7q8fkgse

3. Gift cards and prepaid cards

Gift or prepaid cards serve as versatile reward options that empower customers to select their preferred gifts. These cards can be tailored to a specific business's products or services, or they can have a more universal appeal, being accepted by multiple retailers or for various services. They come in both physical, plastic card formats, as well as electronic coupon (voucher) variations, usually issued with a predetermined value or the option for recharge.

In our opinion, the popularity of gift cards as a reward is on the rise, with an increasing number of companies adopting this solution. Gift cards hold significant value for individuals, often chosen as gifts when uncertainty surrounds the recipient's preferences. Notably, the demand for redeeming points for gift cards tends to peak before the holiday season, typically starting in late November.

Enhancing the appeal of gift cards involves offering additional services, such as personalization to meet customer requirements and elegant packaging for physical cards. Personalization, encompassing features like images, photos, or drawings on the card's front, adds a unique touch to the gift. However, the extent of personalization may depend on the issuer's capabilities and could involve additional costs, often payable using accumulated points.

Another strategy to increase gift card popularity is creating attractive collections that encourage buyers to collect them. An illustrative example is the introduction of gift cards featuring images of national or popular football teams, complemented by a thematic album designed for collection purposes.

Moreover, gift cards serve as coveted prizes in loyalty programs, sweepstakes, and marketing campaigns. This not only boosts brand promotion but also motivates recipients to utilize the cards within the issuing company's stores.

Gift cards play a significant role in attracting new clients. As loyal customers present these cards as gifts or other businesses incorporate them into prize offerings, they often reach potential new shoppers. These cards are likely to be used, especially since their value can expire after a certain period (e.g., two years), with unused funds sometimes amounting to more than 10% of the total value. While this forfeiture can seem like an additional profit, the main goal of a loyalty scheme is to acquire new users. That's why offering special loyalty deals to those who use these cards is essential, thus converting them into regular consumers.

Ultimately, gift cards contribute to increased purchase values. Customers often supplement the gift card value with their own funds, purchasing higher-value items. This underscores the influence of gift cards in steering buyers toward a specific store, potentially elevating the frequency and value of purchases. Such dynamics benefit both existing and new consumers.

Gift cards and prepaid cards advantages

The shopper has real money on the card, which they can spend at a specific time, making them more likely to make a purchase.
It can be easily issued and delivered to consumers if it's available on a QR code.
The residuals on these gift cards are significant and can exceed 10% (extra income).
It makes for the perfect gift for any occasion and is very popular, especially before the holidays.
When used as a gift, it can attract new customers, working additionally as an acquisition tool.

Gift cards and prepaid cards disadvantages

The regulations and rules of use must be in line with local law and need to be verified often according to possible law changes.
Difficulty promoting cards as separate offers.
Increased potential for fraud activity.

Example: Mastercard gift cards (retail offer)

Mastercard gift cards are prepaid cards issued by Mastercard, usable at various retail establishments. Renowned for their convenience and flexibility, these gift cards have become a preferred choice for both gift-givers and recipients.

The "retail offer" feature highlights that these gift cards are commonly found in retail stores, ensuring easy accessibility for consumers. This accessibility not only enhances the overall convenience for shoppers but also serves as a strategic tool for businesses aiming to retain existing customers and attract new ones.

In addition, the availability of Mastercard gift cards in retail establishments becomes particularly advantageous for businesses with their own branded gift cards. This exclusivity can be instrumental in driving sales, as it encourages people to engage with and adopt the specific loyalty scheme associated with the provided gift card. In such cases, the Mastercard gift card becomes a key component of the loyalty offer, potentially creating a unique selling proposition and fostering customer loyalty.

Mastercard gift cards (retail offers) as an example of gift card rewards. Source: https://loyaltygateway.com/rewards/phoenix/mcr1/shop/11578?postaction=initActionShopCatalogDetail&csrf_token=35ti7q8fkgse

4. Cashback

Credit card companies often entice cardholders with the appealing incentive of cashback programs. Essentially, this program involves returning a certain percentage of the amount spent using the credit card back to the cardholder. What adds to their allure is the flexibility of receiving this reward either as a credit to the account, allowing users to recover a portion of their expenses.

As we see it, cashback has gained widespread popularity as a reward due to its straightforward nature, directly reducing the overall cost of transactions. This reward can be structured as either a percentage of the total transaction value or a fixed sum. When strategically employed, the cashback system is frequently utilized to encourage customers to make repeat purchases or increase their spending per transaction.

Fundamentally, the basic principle of cashback is to return a set percentage of a transaction's value to the customer. This feature makes it particularly attractive for credit card users. As a result, this incentive bolsters the use of payment cards, especially credit cards, by offering customers a predetermined refund for their purchases. However, it's worth noting that this refund may be capped at a specific amount each month.

In more advanced rewards programs, such as those associated with co-branded credit cards, the cashback scheme is even more targeted. For instance, certain purchases made at specific locations or with designated partners yield targeted rewards. Consider a scenario where a bank collaborates with another company, let's say a popular airline, to issue a co-branded card.

In such models, purchases made at that partnering airline or its affiliated businesses result in cashback, typically calculated as a percentage of the transaction value, and may include additional bonuses detailed in the terms and conditions. For example, using the co-branded card for airfare purchases may earn you not only cashback but also exclusive benefits such as priority boarding or complimentary airport lounge access.

Co-branded cards. Source: https://www.forbesindia.com/article/take-one-big-story-of-the-day/cobranded-credit-cards-the-battle-for-the-top-spot/87641/1

To address issues related to product returns and the administration of cashback, these programs often extend the timeframe for crediting the cashback to the card. This approach proves advantageous as it prevents unfavorable situations for the customer. Within this extended period, any returns are factored in before the cashback is calculated, ensuring fairness and accuracy in the rewards system.

Co-branded cards, in particular, stand out as highly effective, enabling cardholders to make purchases specifically with the affiliated company using the card. Banks and co-branded partners must prioritize communication of the cashback value to customers, effectively emphasizing the advantages of using this type of card.

Another innovative form of cashback involves funneling funds back into the customer's loyalty scheme account. In this arrangement, the refund essentially acts as a credit for future transactions. For ease of understanding and clarity, such a refund is typically converted into a credit amount for future use in the customer's account. Importantly, the client is given a specified period to utilize these funds, as detailed in the program's terms and conditions, after which any unused discount expires.

This arrangement motivates people to swiftly utilize their accumulated funds in the loyalty account, often within a predetermined short period, like three months. However, such programs require thorough legal and fiscal vetting to sidestep potential complications.

In summary, this approach offers dual benefits: customers enjoy reduced spending through the use of loyalty account funds, while the organizer gains a regularly returning, satisfied customer base. To effectively manage any issues related to product returns, it's advisable to delay the activation of funds in the customer's account accordingly (e.g., 30 days).

Cashback advantages

Easy to implement.
Easy to convince people to use this offer when cashback is at the right amount.
It's easy to operate – the entire idea of a loyalty scheme in your company may be based solely on cashback.

Cashback disadvantages

Additional costs for the third party (bank) that handles cashback on co-branded cards.
Cashback takes up most of the margin allocated to loyalty costs.
When you have cashback, offering other ways to reward your audience is difficult due to the rather high cost of cashback.
Usually, the cashback can be spent anywhere, not only on your offers.

Example: Citi Rewards cashback

The Citi Rewards cashback program incentivizes customers to increase their spending, as the allure of accumulating cashback rewards often leads to larger purchases. This psychological incentive, rooted in the perceived value of earning rewards, encourages customers to favor spending more in transactions where cashback is offered.

Consequently, the aggregate expenditure of these clients tends to be higher, as they're motivated to maximize their cashback benefits. This pattern of spending behavior, driven by the appeal of cashback, not only benefits the consumer through direct financial returns but also significantly boosts the company's revenue.

By effectively aligning the rewards with customer spending habits, the cashback program creates a win-win scenario: customers enjoy the tangible benefits of cashback while the company experiences a marked increase in sales and revenue. This synergy between consumer incentives and company profits is a key aspect of the success of the Citi Rewards cashback program.

Citi Rewards Card August 2023 promotion — Citi Rewards cashback as an example of cashback rewards. Source: https://learntoinvests.com/top-travel-creditcard-2023/

5. "Pay with points" rewards

In this loyalty rewards system, customers earn points based on their spending, creating a unique currency that can later be utilized to pay for goods or services at the specific location dedicated to this payment option. This approach effectively transforms loyalty points into a flexible currency, allowing people to decide when and how they want to redeem them, but only where this loyalty currency is accepted. Such a reward system fosters ongoing engagement with the brand as customers accumulate points over time.

From our angle, the eagerly awaited "Pay with Points" feature represents an advanced-level reward system. It grants users the liberty to choose rewards from the available options in the current offering.

Through "Pay with Points," members of loyalty programs can instantly and effortlessly redeem their points during a transaction, making purchases hassle-free. Thanks to sophisticated loyalty solutions, this mechanism seamlessly converts accumulated points into usable currency during transactions. By doing so, these solutions make it convenient for members to use their points during purchases. Implementing "Pay with Points" involves integrating this feature into the merchant's system, enabling people to choose how much of the total transaction cost they want to cover using points, cards, or other payment methods.

Even if a customer has enough points to cover the entire transaction, they can choose to pay partially with points and use cash or a payment card for the remainder. While this may present certain challenges for the system, it's a straightforward process for both cashiers and customers.

Regarding product returns, funds are returned in a manner consistent with the original payment method during the transaction. The process can be complex, especially if only a portion of the purchase is refunded, where the refund is split proportionally based on the selected payment methods.

Although "Pay with Points" provides numerous advantages, it also entails certain risks, primarily related to potential fraud by staff. However, robust system security measures can effectively mitigate these issues. Another minor concern is the need for clear communication about the value of loyalty points, ensuring that all members understand their worth.

Returning to the benefits, it's essential to highlight the value of collecting points from transactions. For example, if 10% of a transaction's value is returned as points, participants effectively gain additional purchasing power since these points can be used for future purchases. This ability to pay with points applies to all products covered by such promotions, regardless of whether it's fuel, a can of Coca-Cola, a stylish pair of sunglasses, or a tech gadget. What's more, customers continue to accumulate new points from these transactions, following the established rules for awarding points.

Customers continually accumulate points, enabling them to use them for future transactions. This is advantageous for retailers as it boosts their turnover. Importantly, people are motivated to shop with a particular retailer to accumulate more points quickly and redeem them for desired products. Also, business transactions funded through loyalty programs also benefit both the shopper and the retailer, as the loyalty program's offerings often influence such decisions.

"Pay with points" rewards advantages

High customer activation in the loyalty program.
Active use of loyalty programs. In most cases, program points are used for partial payments, where the remainder is paid by cash/card.
It's one of the best rewards for the brand audience, building even greater loyalty.
Other rewards are less attractive when compared to this model.
No stock and logistical issues.
Customers can spend more than they can afford and collect more new points due to the higher value of the transaction.

"Pay with points" rewards disadvantages

Paying with points usually results in high costs, allowing customers to figure out the value of their points easily.
A heightened risk of fraud.
It can be challenging to leave the program.
Investment in solutions that allow payment by points and split payment.

Example: BPme Rewards

BPme Rewards is a loyalty scheme provided by BP, a multinational oil and gas company. This program enables members to accumulate points through purchases made at BP gas stations or participating retail outlets. These earned points can later be utilized to redeem a variety of rewards, such as discounts on fuel or merchandise.

For instance, when a customer opts to pay for a product, such as fuel at a gas station, using accumulated points, the process is straightforward. The cashier verifies if there are sufficient points for the transaction, and if so, the system automatically applies the points to cover the fuel cost.

BPme Rewards as an example of pay with points rewards. Source: https://www.bp.com/en_us/united-states/home/products-and-services/bpme-rewards.html

In cases where the points balance in the customer's loyalty account is insufficient to cover the entire transaction, the loyalty system offers flexibility – it allows the payment to be split between points and cash or card, enabling the person to strike a balance between redeeming points and making a partial payment in cash or card to cover the total receipt value.

6. Charity donations

Certain loyalty programs offer customers the option to donate their rewards to charity, catering to socially conscious consumers. This entails contributing points or cashback to humanitarian events or causes, benefiting the charity, and enhancing the brand's image through association with social responsibility and philanthropy.

A substantial reward within a loyalty scheme involves selecting a well-chosen charitable cause, preferably a long-term one. Customers can choose this cause by donating their accumulated points to it. This charitable purpose should align with a reputable charitable organization, ensuring credibility and fair fund usage. Establishing public trust in this organization is crucial! Once selected, a contractual agreement should outline the terms of cooperation and communication.

Attention to billing and marketing aspects is crucial, with a collaborative agreement on the program mechanics related to the charitable purpose. When launching a charity option, be sure to communicate clearly and explain the rules thoroughly. Also, simplify the information, as this increases understanding and the likelihood of a positive response.

Clients often accumulate funds in a loyalty program without a specific purpose, while others choose gifts for which they accumulate points. More so, some participants may not consider it at all but still engage in the scheme. Adapting appropriate communication to all customer groups about the option to donate points to charity is desirable, as interest in such rewards is often high.

To amplify the impact of the message, the organizer can enhance the contribution to the charity idea. For instance, doubling the points donated to charity within a specific time frame can mobilize program donors.

This approach is likely to be well-received by participants, significantly bolstering the promotion of the supported charitable cause. From loyalty experts' perspective, maintaining consistency in reminding clients about this long-term goal during the program is crucial, and engaging in communications that actively support the chosen charitable cause with the organization proves to be beneficial.

Operationally, implementing this type of reward – transferring points to support charities – is straightforward. Creating a reward, say 10 points, that shoppers can repeatedly contribute increases the dedicated points. The total points, consolidated periodically (e.g., monthly), can be converted into funds and transferred to the chosen charitable organization, which should issue a confirmation. Furthermore, informing customers about the annual accounting of donations increases transparency and reinforces the program's commitment to charity.

Charity donations advantages

Enhances brand image by associating with social responsibility and philanthropy.
Increases customer engagement by catering to socially conscious consumers.
Establishes credibility and trust by aligning with reputable charities.
A simple donation process encourages positive responses.
Allows meaningful use of unused loyalty points.
Amplified the impact of donations through promotional activities.
Straightforward operational process for converting points to donations.
Transparent reporting of funds transferred to charities.
Demonstrates Corporate Social Responsibility (CSR) values.
Easy and verifiable donation process for customers.

Charity donations disadvantages

Complexity in effectively communicating the donation concept to end-users.
Not all clients are interested in donating rewards – some prefer personal use.
Additional operational costs for setting up and maintaining the donation system.
Potential reduction in personal incentives for loyalty scheme participants.
Risk of misalignment with people's interests or brand image.
Success depends on the reputation of the chosen charitable organization.
Perception of limited impact from individual contributions.
Continuous effort required for communication and engagement.
Challenges in ensuring and verifying proper fund utilization by charities.
Potential customer skepticism about the transparency and impact of donations.

Example: Hilton Honors charity donations

Incorporating charity rewards into loyalty programs effectively highlights Corporate Social Responsibility (CSR) values and also provides clients with a unique opportunity to contribute to charitable causes. Despite the initial perception of complexity, especially when communicating the concept to end-users, charitable donation campaigns typically come with minimal drawbacks.

For members of loyalty programs holding miles, points, or other loyalty currencies who wish to support charities, a straightforward donation process is essential. Ensuring that the donation process is user-friendly and easily verifiable is crucial to encourage customer participation.

To promote transparency and accountability, buyers should have the ability to effortlessly track their charitable contributions within the loyalty scheme. Providing a periodic report that outlines the extent of funds transferred fosters credibility and reinforces the positive impact of these philanthropic endeavors.