Customer loyalty is a cherished asset, and loyalty programs are a pivotal tool for nurturing and retaining it. These programs often come brimming with promises of fantastic rewards and exclusive benefits, designed to encourage repeat business and create a sense of attachment between customers and brands. 

However, it's not uncommon for businesses to find themselves in a perplexing situation where clients are amassing loyalty points but not spending them. If you're dissatisfied with the redemption rate and wondering why customers aren't claiming rewards, you're in a good place! This dilemma, often underestimated, is more than just a numbers game — it speaks volumes about the effectiveness of your loyalty program. After all, a high redemption rate is a barometer of customer satisfaction and program allure. 

In this article, we'll delve into the intricacies of driving redemption of rewards in loyalty schemes and why it's crucial to keep the redemption rate as high as possible. Let's explore the underlying factors and ensure your shoppers not only collect points but also eagerly exchange them for prizes.

The article was created together with Monika Motus, a digital and loyalty consultant who has worked for Starbucks (AmRest), iSpot, and Douglas.

What will you learn from this article?

• What is redemption rate in loyalty programs?
• How to calculate the redemption rate of a loyalty program?
• What influences a high redemption rate?
• How to drive rewards redemptions and encourage users to get prizes?
• How to plan a rewards catalog effectively?
• How to promote the rewards catalog to engage members to claim rewards?
• How to choose prices at reward points so that they're attractive?

Key takeaways

• The redemption rate depends on the program structure and industry, the diversity of the rewards catalog, user behavior, and customer demographics and preferences.
• If you want to improve your redemption rate, focus on areas such as visibility, accessibility, point expiration, and ongoing benefit-oriented communication.
• When promoting your rewards program, keep it visually appealing with smart placement of rewards orders, personalized engagement, and a streamlined redemption process.
• Choose prices at reward points based on customer transaction behavior and profitability assessment.

What is redemption rate in loyalty programs?

The redemption rate in loyalty programs is a crucial metric that quantifies the effectiveness of customer engagement initiatives. This metric signifies the percentage of rewards or points earned by loyalty program members that are actually utilized or redeemed. 

Various factors impact the redemption rate, including the program's design, the perceived value of incentives, member engagement, and the specific industry in which the program operates. Remember that the redemption rates can fluctuate but generally should be more or less constant.

How to calculate the redemption rate of a loyalty program?

If you want to calculate the redemption rate for your business case, use the redemption calculation formula below and benefit from further explanation.

‍Redemption Rate (%) = (Number of Points or Rewards Redeemed / Total Number of Points or Rewards Earned) x 100

Explanation:

1. The number of Points or Rewards Redeemed. The total number of points, rewards, or benefits clients have used within a specific period. For example, if a customer uses 100 points to claim a discount or a free product, this contributes to the numerator of the formula.
2. Total Number of Points or Rewards Earned. The cumulative number of points, rewards, or benefits buyers earned during the same period. It includes points earned through purchases, referrals, social media engagement, or any other methods defined by your loyalty program. This is the denominator of the formula.
3. Redemption Rate (%). The metric you want to calculate. It represents the percentage of earned points or rewards that customers have actually used. It provides insights into the level of engagement and satisfaction among your loyalty program participants.

Here's an example to illustrate how to calculate the redemption rate:

Let's say in a given month, your clients collectively earned 50,000 points through purchases, referrals, and other activities. During the same month, they redeemed a total of 10,000 points for discounts, free products, or other incentives. 

Using the formula:

Redemption Rate = (10,000 / 50,000) x 100 = 20%

This means that the customers redeemed 20% of the points they earned during that month.

Expert advice on measuring the redemption rate

To evaluate the performance of points programs effectively, it's recommended to employ two key metrics:

• The redemption rate at the total level
• The popularity of individual rewards

Measure the redemption rate metric to get a high-level perspective on the program's success in encouraging point redemption. 

Additionally, monitor the popularity of individual rewards within the program. This entails assessing which segments of customers are most frequently selecting specific rewards. Such an analysis provides valuable insights into customer preferences and needs. By identifying the most favored rewards, you can ensure their availability and, if necessary, adjust the rewards catalog.

It's also advisable to explicitly state in the program regulations that the rewards catalog can be subject to change. This flexibility ensures that the program remains responsive to customer preferences and evolving needs.

What influences the high redemption rate?

Various factors can influence the redemption rate in rewards programs, and its level varies depending on the specific circumstances. To better understand what influences the redemption rate and how it can differ across different scenarios, we broke down the key factors and examined each one.

Program structure and industry

First, bear in mind that the structure of your loyalty program plays a crucial role. Suppose your rewards program offers a limited number of rewards, such as a single reward where a specific number of points leads to a particular benefit (e.g., X points for a 10% discount voucher or a free product). In that case, the redemption rate tends to be high. Users have a clear and straightforward goal, making them more likely to redeem their points.

Also, the industry in which your business operates can impact redemption rates. Some industries naturally have higher or lower redemption rates. For instance, retail companies may see higher redemption rates for discounts, while the travel industry might see lower rates due to the accumulation of points for bigger rewards like free flights.

In assessing redemption indicators for loyalty schemes, consider the program's nuances. When a rewards program offers a single, vital reward, a high redemption rate, ideally around 80-90%, is crucial. However, in programs with a variety of rewards, a lower redemption rate may reflect users saving points for more valuable items. It's essential to adapt our approach based on the program's structure and reward customers based on their behaviors.

Reward catalog variety

In loyalty programs with a diverse reward catalog, where users can choose from various categories of prizes, vouchers, or other options, the redemption rate is typically viewed differently — users have more choices, so the redemption rate for specific rewards can vary significantly.

Lower redemption rates on certain rewards can result from users strategically collecting points to aim for more valuable rewards. They might wait to accumulate enough points for a more expensive or exclusive item. On the other hand, some individuals might never reach a high points threshold and prefer to redeem their points for smaller, more readily accessible rewards.

User behavior

The level of user engagement with your loyalty program can significantly affect redemption rates. If users are actively participating, they're more likely to redeem points. However, if the program doesn't engage members effectively, the redemption rate tends to be lower.

Effective communication about rewards and incentives to redeem points can drive higher redemption rates. Use promotions, reminders, and personalized offers to encourage users to utilize their points.

Customer demographics and preferences

Different customer segments may exhibit varying redemption behaviors. For instance, college student John and busy professional Sarah prefer instant gratification, redeeming their points as soon as they earn them. On the other hand, working mom Emily and retired gentleman Michael take a patient and strategic approach, saving points for special occasions or larger rewards. 

These differences illustrate how distinct customer segments within the program exhibit varying redemption behaviors, highlighting the need for a tailored approach to meet diverse customer preferences.

How to drive rewards redemptions and encourage users to get prizes?

There are four main areas that you should focus on when it comes to boosting the redemption rate for your loyalty program: visibility, availability, points expiration, and communication. 

Visibility

Regarding the effectiveness of loyalty schemes, one crucial factor that demands close attention is the visibility of the rewards offered. Brands have the power to shape their program's success by strategically managing the promotion of these incentives throughout various customer touchpoints. From the rewards catalog to other interactions within the program, how you present rewards can significantly impact customer engagement and satisfaction.

The approach to visibility largely depends on how a brand defines the customer journey within the loyalty program. There are various strategies to consider:

1. Present the entire rewards catalog (all at once), allowing customers to explore the full range of available incentives.
2. Opt for a more personalized approach, where individual users see a curated selection of rewards tailored to their preferences or even suggestions based on their current points balance. This approach can remind clients of the incentives they're close to achieving, further incentivizing their participation.

To enhance the visibility and attractiveness of rewards, brands employ various tactics. One effective method is to add eye-catching emblems and icons next to specific perks. These badges can indicate different qualities, such as:

• "Bestseller"
• "New"
• "Top Picked"
• "Seasonal Reward"
• "Only Now"

Seasonal prizes, for instance, offer time-sensitive opportunities, creating a sense of urgency and excitement. For example, a pizza restaurant might introduce a special pizza flavor available for a limited time as a reward, marked with an emblem signaling its exclusivity. This prize not only piques customer interest but also encourages timely participation.

Another approach to optimizing the redemption rate in loyalty schemes involves offering branded products as rewards. These products should align with the brand's values and the industry in which it operates.

For instance, a clothing store could offer branded umbrellas, while a coffee shop might entice shoppers with coffee mugs. Similarly, a DIY store could feature work gloves, and a cosmetics store could provide makeup bags. By offering everyday items that are both useful and congruent with the brand's identity, companies can build brand awareness and foster positive associations.

Moreover, considering seasonality in reward offerings can be a smart strategy. For instance, in the summer, a brand could introduce incentives like beach towels or beach balls, while during the winter, gloves or thermoses could be enticing options.

If these seasonal items aren't part of the brand's regular product lineup, branding them can add a unique touch. Inform customers that these items are only available as prizes for a limited time, emphasizing their exclusivity and desirability. This approach not only adds value to rewards programs but also encourages clients to engage with the brand during specific seasons.

Availability

When a loyalty program boasts an extensive catalog of prizes, it may seem like a boon, but it can also become a logistical challenge. Managing the availability of these prizes becomes paramount. For instance, if an annual winner expects to claim an iPhone as their reward, the program managers must ensure that the product is in stock or readily available through third-party providers.

A comprehensive prize catalog, while enticing, can paradoxically overwhelm customers. The abundance of choices can lead to a decision-making dilemma, leaving clients perplexed and unable to make a choice. Buyers may find themselves perusing the catalog, being drawn to numerous items, and ultimately deferring their final selection due to the sheer number of options. This indecisiveness can hinder the redemption rate and, consequently, the overall success of your loyalty program.

Another strategy to consider is including products from the brand's current offerings in the reward catalog. Many brands opt to feature products already available for purchase as prizes. This approach can be particularly effective for products that, while not an immediate priority for customers, are still desirable and relevant to the industry in which the loyalty program operates. By offering these in-house products as rewards, brands can save on costs compared to offering third-party items.

Pay attention to the value of vouchers included in the catalog. That's why prioritizing the coupon redemption rate for the brand's products and services before third-party options can be a strategic move. For instance, favoring vouchers for the brand's store over Amazon can often be more cost-effective, as it promotes customer loyalty to the brand and may lead to a higher redemption rate.

In conclusion, managing the availability and diversity of rewards in a loyalty program is crucial for optimizing its redemption rate. A well-balanced reward catalog that takes into account the preferences of customers, the brand's image, and cost-efficiency can go a long way in enhancing the overall success of the reward programs.

Points expiration

One common practice in loyalty programs is the time-barring of points (expiration dates). Time-barring means that the points a customer earns have an expiration date, after which they become invalid. This expiration policy serves several important purposes.

First, you can easily encourage customers to remain engaged with your program. By creating a sense of urgency to use their points, members are motivated to continue interacting with your business and repeat purchases. 

To communicate the impending points expiration effectively, businesses often use various channels. Mailing recipients with their current point balances and highlighting the rewards within their reach is a common method. You should include information such as:

• The number of available points
• Expiration date
• Available offers to be used
• Steps to take to prevent expiration

Keeping members informed about the status of their points is a great way to keep them interested and participating.

‍

In addition, mobile loyalty apps play a vital role in the process by sending push notifications to users about the upcoming expiration of points.

Businesses have to take action when they notice a user isn't using their points. By proactively determining when points expire on the loyalty platform, a company can avoid unnecessary financial costs. Accumulated points that never get used can affect a company's Profit and Loss (PNL) statement and influence its financial reserves. Ultimately, the goal of a loyalty program is to encourage active point utilization.

Points expiration policies can vary and are often categorized as follows:

1. Units never expire. Some loyalty programs offer points that don't expire at all. This approach ensures that customers can accumulate and use their points at their own pace without any time pressure.
2. Expiry after X days. In this category, points have a defined lifespan and will expire after a specific number of days if not used. This pressure creates a sense of urgency for clients to redeem their prizes within the given timeframe.
3. Expiry at the end of the month. Loyalty programs may have a monthly expiration policy, where points collected during a month will expire at the end of that same month. This timer encourages regular interaction with the program.
4. Expiry at the end of the X-th year. Some programs opt for an annual expiration approach, where points accumulated during a calendar year will expire at the end of that year. This limitation ensures that customers maintain their engagement throughout the year.

In loyalty platform statistics such as Open loyalty, there are two key metrics used to measure the customer's engagement:

1. Total earned points. Shows how many points a user has accumulated over time. It provides a comprehensive view of the customer's loyalty history.
2. Active points. Represent the number of points a user currently has in their account. This metric offers a real-time snapshot of the customer's engagement with the loyalty program.

Points expiration has a dual role for you: it motivates customer engagement and helps manage your business costs.

To strike the right balance, establish clear and fair expiration policies and keep your customers informed. As we’ll cover below, ongoing communication and data tracking are crucial for maintaining this balance in your loyalty programs. Remember to continuously work on your own strategy for notifying recipients about point expiration.

Communication 

Before jumping into communication, understand the meaning of customer segmentation in your loyalty program. When developing a rewards catalog for your loyalty program, it's essential to carefully consider the unique characteristics of the customer segments you're targeting. The goal is to ensure every segment finds appealing options in the prizes catalog.

‍

Personalization plays a pivotal role in this process, and it can be implemented at the customer account level, typically through loyalty program member card IDs. Diversifying rewards based on the member type and their activity within the program is essential. 

When designing your rewards catalog, it's important to consider the significance of reward thresholds and categories. This approach allows for a balanced strategy that caters to different customer segments effectively. By defining specific thresholds or categories of perks, you can achieve the following objectives:

1. Motivating low-spending customers. For customers who make infrequent transactions, such as once every three months, providing attainable rewards is crucial. This approach encourages them to become more engaged in the loyalty program, as they find the incentives easily attainable.
2. Encouraging increased engagement. By offering incentives that are within reach for less active customers, you motivate them to increase their frequency of transactions, thereby contributing to their overall value to the program.
3. Sustaining high-spending customers (VIPs). VIP users typically comprise around 10-20% of the total member base. These customers who make frequent transactions, such as five times a week and more, require incentives that maintain their motivation and encourage them to aim for even more significant benefits.

This strategic design can make the loyalty program more inclusive and engaging for shoppers at various levels of engagement. By creating a tiered system of rewards or adjusting the criteria for earning points, you can align the program with diverse needs and consumer behavior.

It's natural to have a mix of customer types in your loyalty program!

How to effectively plan a rewards catalog?

When developing a comprehensive prize catalog for your scheme, especially one with a wide range of prizes in different categories and values, you need to consider some key strategies. This is truly important when promoting high-margin or proprietary products, as they typically offer the best profitability.

For example, if you include items like luxury watches or cutting-edge electric bicycles in your prize catalog, they're undoubtedly attractive prizes. But you're well aware that the cost of acquiring and storing them is substantial, right?

On the other hand, some companies choose to offer prizes that match their existing product offerings. This allows customers to either buy these items or redeem their accumulated points for them. In contrast, introducing third-party rewards, prizes that aren't part of your company's product range, requires a financial investment.

While offering third-party prizes can improve how users perceive your loyalty program, it does come at a significant cost for your company. If you include too many third-party incentives in your catalog, you might realize that the return on investment isn't as favorable as you expected.

"Planning an effective prizes catalog is a strategic endeavor that demands careful consideration of numerous factors. As you delve into the art of designing a prize catalog, you'll find that the choices you make can significantly impact both the attractiveness of your program and its financial viability. Think of it as a delicate balancing act where you aim to provide alluring incentives, encourage product usage, and maximize profitability."

Here are some key factors based on expert knowledge and experience that you should consider when planning and selecting rewards from the catalog for your loyalty program to avoid customer retention.

1. Audience attractiveness. The incentives in your catalog must appeal to a broad spectrum of your program's users. This grouping includes both newcomers and long-time, heavy users. It's essential to strike a balance to engage and retain customers at different stages of their journey with your brand.

2. Business specifics and industry. Consider the nature of your company and industry. Different industries may have different customer preferences and expectations when it comes to incentives. Rewards should be consistent with the nature of your products or services.

3. Types of rewards:

• Discounts. Offering discounts on purchases is a popular choice. It appeals to cost-conscious clients and encourages more spending.
• Cashback. Cashback rewards provide customers with a direct financial benefit, making it a compelling choice for those seeking tangible returns.
• Vouchers. Coupon redemption can be customized to specific products or services, making them a flexible option that adds a personalized touch to your loyalty scheme.
• Material rewards. These could include physical items such as merchandise, gadgets, or even exclusive, branded products that hold a perceived value.
• Additional services. Providing access to premium services or exclusive offerings can be a powerful incentive for some new customers.

"Imagine a company that lures in their clients by offering Apple AirPods or iPhones as rewards. It definitely grabs people's attention, but it comes at a high expense. On the other hand, there are brands that provide rewards using their own products, either through purchases or points redemption. The decision between using rewards from external partners or your own products significantly impacts the financial aspects of your rewards program."

4. Realistic requirements. Set ambitious yet attainable requirements for clients to earn these rewards. The goals should challenge recipients but not be so unattainable that they discourage participation.

5. Avoiding overwhelming variety. While diversity in your catalog is essential, avoid going overboard. A vast array of rewards can become operationally challenging to manage. It may also overwhelm customers, leading them to decide not to pursue any prizes at all. 

"Successful loyalty schemes require careful consideration of customer preferences and reward structures. Think about what rewards will attract your customers, set ambitious yet realistic requirements for winning them, and avoid overloading your program with an extensive catalog of rewards. Doing so can make it difficult to manage operationally and overwhelm clients, leading to a situation where they ultimately choose none of the available options."

How to promote the rewards catalog to engage members to claim rewards?

1. Visual appeal

One of the key strategies for boosting redemption rates is presenting the rewards catalog in an attractive and visually appealing manner. The first step in this process is to ensure that every reward is showcased with high-quality photos and clear, compelling descriptions. Paying attention to detail is vital, as this sets the stage for the customer's perception of the reward's value.

What's more, products that the company wishes to promote more vigorously can receive unique emblems such as "novelty," "bestseller," or "most selected." This approach makes these items stand out and piques the customer's interest.

2. Smart rewards order placement

The order in which prizes are displayed in the catalog plays a significant role in redemption rates. To maximize redemption, consider showcasing rewards the user is already eligible to receive or those they're very close to obtaining based on their accumulated points or purchase history. This approach encourages customers to act immediately and claim prizes as they see their efforts paying off. By placing these attainable rewards front and center, you create a sense of achievement that can motivate members to take action.

Also, show members the already redeemed coupons to demonstrate the value and benefits of participating in your rewards program. When users see that others have successfully redeemed prizes, it serves as social proof and can further motivate them to engage with the scheme and strive to earn their own prizes. This social validation can build a sense of community and trust, enhancing the overall effectiveness of your rewards program and contributing to improved customer retention.

3. Personalized engagement

For customers who accumulate points but rarely use them, personalized engagement can be a game-changer. Sending targeted loyalty messaging that showcases the rewards they can collect based on their preferences and past activity can reignite their interest. This reminder of the benefits they're missing out on can be a strong motivator to prompt redemption.

4. Streamlined redemption process

A critical factor in redemption rates is the ease and convenience of the reward collection process. If this process is cumbersome and time-consuming, it can deter customers from claiming their rewards. Having a smooth user interface is especially relevant when dealing with third-party products in the prize catalog, as the logistical processes involved in their delivery may be more complicated.

To counteract this, prioritize clarity and convenience in the redemption process. Making it user-friendly not only improves redemption rates but also enhances the overall customer experience.

Find out how to complete the configuration of the most popular campaigns in Open Loyalty. Download 10 market-proven loyalty campaign templates (2023). 

‍

How to choose prices at reward points so that they're attractive?

When selecting the right redemption rates for your loyalty scheme, it's essential to avoid relying on vague or unpredictable methods. The unfortunate cases of loyalty programs where users are required to amass points for extended periods, sometimes spanning a decade, just to claim a seemingly basic item like… a tote bag or a key ring is a stark reminder of the importance of meticulously strategizing redemption rates. That's why it's prudent to dedicate some time and thought to this crucial aspect of loyalty program management.

To determine the optimal point thresholds for certain incentives, you need to use a multi-faceted approach. Let's explore two key factors that can help you strike the right balance and make reward points compelling to your target audience.

1. Customer transaction behavior

First and foremost, it's imperative to factor in the frequency and the average value of individual transactions within your customer base. These insights can be gleaned from your existing data or can be collected through careful analysis.

By understanding the typical transaction behavior of your customers, you can then recalibrate the redemption requirements. This involves calculating how long it would realistically take a user to accumulate enough points to claim a reward of a specified value. 

The goal here is to reach a compromise between providing enticing rewards and ensuring that they remain within reach for the average customer, making the loyalty program more attractive.

2. Profitability assessment

Additionally, it's paramount to consider the profitability of your loyalty scheme. Once you have a clear grasp of the reward values and redemption thresholds, you can reevaluate the impact on your program's profitability. This analysis involves recalculating the value of the discount offered to customers and assessing how it may influence your bottom line.

Only by maintaining a keen eye on both the customer experience and the financial viability of your loyalty program can you strike the right equilibrium between offering appealing incentives and preserving the program's sustainability. This balance is instrumental in ensuring the long-term success and effectiveness of your loyalty initiative. So, when choosing reward prices for your loyalty scheme, remember to make them both enticing and economically sustainable to create a win-win situation for your business and your clientele.

Stay on top of your loyalty game! Learn how to complete the setup of the most popular campaigns in Open Loyalty to boost and measure customer loyalty. Download 10 market-proven loyalty campaign templates (2023).

‍