Measure Your Loyalty Program Utilization With This Key Metric

The effort and time a company puts into building and launching a loyalty platform makes the time after launch seem like smooth sailing. Right?

Not quite! After launch, you want to constantly be monitoring your program to ensure everything is running smoothly. Part of loyalty program best practices is to look for ways to optimize program performance through data collection. Post-launch you want to diligently track your program metrics and KPIs so you can evaluate your loyalty program and discover opportunities to fine-tune your processes. 

Once your loyalty program has been operating long enough  (the first 3-6 months is a good timeframe) there are different metrics you can use to gauge program performance. One area to focus on is loyalty program rewards activity and reward redemptions among your customers. Reward redemption rates are important because they help answer a key question: how are your customers utilizing the loyalty program?

Calculating Redemption Rates

The rate at which customers turn points into rewards reveals several informative points about your loyalty platform. Redemption rate is the proportion of all points awarded and then redeemed. To get this number, divide the number of points customers spend on rewards by the total number of points issued.

There are different ways you can assign a value to your reward points when calculating redemption rate. In this example here, Nerdwallet uses cents per point in their breakdown of frequent flyer program redemption values. Companies that heavily feature coupons divide the number of coupons issued by the number of coupons redeemed to calculate their redemption rates. Another example is credit card programs which assign one point per dollar spent.

Take the time to calculate your redemption rate when you know your point values.

What Is A Good Redemption Rate?

Generally, you’re looking for anything in the double digits – 10%-30% is a good range. 20% is considered the sweet spot for most major retailers. Single-digit redemption rates are a sign you might need to revisit your available rewards or focus more on marketing your rewards program.

Don’t fall for the idea that a higher level of redemption is a bad sign. A high redemption rate is a great thing! It shows your platform is working – your customers are engaging with your loyalty program. They’re earning points and redeeming points for rewards. Customers view your program as valuable and your program's rewards are worth their time and efforts to accumulate points.

What If Redemption Rates Are Too High?

As a reminder, you should never aim to have a 0% or close to 0% redemption rate. Even if a low redemption rate is more cost-effective, it doesn't make your loyalty program sustainable long-term. Customers won’t take part in a rewards program that doesn’t bring them any rewards.

That being said, there are cases when a high rate of redemption can be detrimental to program success. The cost of redeeming rewards may start affecting your bottom line when your redemption rate is far above the average of 10-30%.  You may need to reevaluate how generous you’re being when awarding points to customers or analyze point values of rewards that are redeemed too quickly or easily.

How To Get To An Ideal Redemption Rate

There are methods for raising or lowering your redemption rate depending on your needs.

For a lower loyalty program redemption rate, focus on increasing customer engagement with your loyalty program. Create email newsletters updating members on their total accumulated points and the different rewards available to them. You can use data segmentation tools within your loyalty platform to create specific customer groups based on attributes such as total accumulated points or past redemption history, and then run specific campaigns to increase reward redemptions. If you run a tiered rewards program then you can use email or push notifications to send customer communications suggesting ways they can earn enough points to advance to the next tier level (and thus access more benefits or rewards). 

For a high loyalty program redemption rate that is cutting into your revenue, you need to determine how to adjust your reward points value. Consider removing or replacing certain rewards items from your rewards catalog. Another option is to raise the number of points required to redeem for rewards. However that is not always a popular choice among users, so be sure to conduct appropriate research and data analysis before making any decisions. 

As always, when making changes to your loyalty program you need to do so carefully – if your redemption rate is at a good level then your customers like what they see. Any significant changes could result in a downturn in reward redemptions and a loss of customer engagement within your loyalty program.

Have more questions on loyalty program utilization? Reach out today to learn how we can help set your loyalty program up for success!