Redemption Value to Calculate Loyalty Rewards Points

How much are your reward points worth? 

So you (want to) have loyalty rewards and referral programs. Let’s face it; the reward you give to customers for loyalty is a cost for retaining them. Similarly, the rewards you offer customers for referrals is a cost of new customer acquisition. These costs are obviously important because they affect your company’s bottom line. However, they should not be considered in isolation because your customers must perceive value in order for them to not only be attracted to join but to also engage and remain long term. Essentially therefore, assigning value to your program’s rewards is a balancing act.

The Redemption Value of Reward Points (as cents or a percentage)

The ‘redemption value’ aka cents per point / CPP is the value, expressed in cents that you assign for each of your program’s reward points. It is the real 'money value' of reward points. One way of considering this metric is that it is a measure of the customer's return on investment (ROI) for having a relationship with your brand. Consequently, it is based on the sales price (ie versus your internal costs). To calculate the redemption value of each reward point; first convert the reward’s regular sales price from dollars to cents (ie multiply the sales price of your prize in dollars by 100). Then divide the result by the number of points needed to redeem the reward. The result number of cents is the sales price in cents per point where the higher the numerical value, the greater the dollar value to customers.  

[Redemption Value = (Sale Price in Dollars X 100) / Reward Price in Points]

A result of 1.0 means that 1 point is equal to 1 cent (... or 1% of the sale price). It is ideal to convert your result to cents because each cent = 1%, ie the value of this reward is 1% of the in dollars and cents sale price. Similarly, a result of 0.5 means that 1 point is equal to 0.5 cents and so on. Consequently, the value of 1 cent is greater in value than that of 0.5 cent. 

Example: 700 points for a $7.00 reward has a redemption value of 1 cent or 1%.

($7.00 X 100) /  700 points

NB. If you are working with or comparing redemption values across currencies, convert all of the sales prices in cash to a single currency. This will ensure that you are comparing apples and apples. 

Example 

If you normally convert currency XXD to USD by dividing by 574, proceed as follows.

(XXD $1879 X 100) / 100 points = 

(187,900 cents / 574) / 186 points =

1.76 cents or 1.76%

Since your customer experiences the redemption value within the context of his or her personal costs associated with acquiring the reward (like shipping, taxes, traveling and other extrinsically related costs), it is more accurate to calculate the redemption value accordingly as follows. Since a sales price translates into a higher redemption value, these extra costs reduce the value of your reward.

[Redemption Value = (Sale Price in Dollars - Expense in Dollars  X  100) / Reward Price in Points]

Example: 700 points for a $7.00 reward. However, the customer must pay $0.50 for shipping. The redemption value is 0.93 cent or 0.93%. The value is therefore lower than if the customer does not need to pay for shipping.

(($7.00 - 0.50) X 100) /  700 points = 0.93 cents, less than 1 cent.

Conversely, if you can afford to increase the sales price part of the equation, ie by including costs like shipping (as free shipping) in your reward, you will raise the value of the reward.

[Redemption Value = (Sale Price in Dollars + Expense in Dollars  X  100) / Reward Price in Points]

After you have already established your point values and are already using points, your employees can use the redemption value of points to quickly quantify

• how much in dollars & cents you pay customers for each form of engagement. 
• the sale price value in cash of un-redeemed points for one customer, a segment or all customers

[ DIAGRAM:   Sale price in dollars & cents = Redemption value X # points]

Example: Using the scenarios above; if the redemption value is 1 cent (ie 1%) and a customer will receive 700 points, the sale price value in cash will be

(redemption value X points) / 100 to convert to dollars 

(1 X 700 points) / 100 = $7.00    

Example: Using the scenarios above; if the redemption value is 0.93 cents (ie 0.92%) and a customer will receive 700 points, the sale price value in cash will be 

(redemption value X points) / 100 to convert to dollars 

(0.92 X 700 points) / 100 = $6.50

Your Costs

As previously suggested, you may award points for customer activities that help you fulfill marketing objectives like signing up for an account (to improve marketing via CRM), sharing the hyperlink to your store (to increase brand awareness), referring friends (to acquire new customers) and so on. To calculate these costs, analyze your customer data.

As discussed below, all activities are not equally valuable in their contribution to your business. Consequently, you can apply different redemption values accordingly for each type. Additionally, now that you know how to convert back and forth from sale price in cash and points, you have only to determine the cash value of customer activities as the basis for establishing the point value of rewards.

1) Customer Acquisition Costs (& Corresponding Points)

Method 1: One way of valuing rewards for newly referred customers or ‘referrals’ is by examining their average order value (AOV). Let’s say the AOV is $15. Knowing that is the amount they are likely to invest in their first sale, you can assign points worth $15. (However, in order to ensure that you at least break even on that $15 referral cost, you can create the condition that new customers must shop for at least that amount in order to qualify to redeem that amount.)

[DIAGRAM: # Points Due = Redemption value X (Acquisition Cost as a Reward in Cash X 100 cents)]

Example: If the redemption value is 1 cent (or 1%) and the acquisition cost is $15; 

The points to be awarded are as follows

1 X ($15 X 100 to convert to cents)

1,500 points

Example: If the redemption value is 5 cents (or 5%) and the acquisition cost is $15; 

The points to be awarded are as follows

5 X ($15 X 100 to convert to cents)

7,500 points

Example: It is unlikely that the redemption value for referrals should be as low as 0.93 cent (or 0.93%). However, if it were just for the sake of illustration of these calculations, ie while the acquisition cost is $15; 

The points to be awarded would be as follows

0.93 X ($15 X 100 to convert to cents)

1,395 points

Method 2: Use historical data to estimate your cost of acquiring new customers then set your referral rewards slightly under that cost so that you lower your acquisition costs.

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2) Costs of Fan Page Likes & Comments on Your Brand’s Posts  (& Corresponding Points)

Quite apart from referral activities, community building activities are less directly related to converting leads. They include signing up, sharing your brand’s hyperlinks with their circle of influence and publicly engaging with the brand whether through following vlogs / blogs, commenting on posts, fan page likes, product reviews and so on. In short, consider the relative value of these activities to your objectives. For instance, a referral helps you to meet your customer acquisition objectives much better than fan page likes. You should therefore NOT assign the same value to referrals and shares.

Additionally, if you can, use your website analytics to determine the relative costs. For instance, if Facebook ads costed you $1 for 100 impressions, consider offering $1 worth of points for customers who share your content on that platform. After all, most people are known to have roughly 155 Facebook friends. If you do not know your industry standards, you can start with a common generic standard rate is 1%.

Example: If the redemption value is 1 cent (or 1%) and the brand awareness cost is $1; 

The points to be awarded are as follows

Redemption value X (Reward value in cash X 100 to convert to cents)

1 X ($1 X 100 to convert to cents)

100 points

Example: If the redemption value is 0.93 cent (or 0.93%) and the brand awareness cost is $1; 

The points to be awarded are as follows

Redemption value X (Reward value in cash X 100 to convert to cents)

0.93 X ($1 X 100 to convert to cents)

93 points

3) Cost of Rewards for Customer Purchase 

Use your the industry standard redemption value as a starting point. If you are unsure of the value, analyze a competitor's catalogs based on both the regular sale price in cash and rewards price in points for the same product.

Earlier, I discussed the spend-based (versus visit-based) loyalty rewards as a means of ensuring that customers with the higher order value get more rewards. You can calculate the price in reward points accordingly. Specifically, your price in points can include the value of points for all of the prerequisite sales in cash to qualify.

Example. Let's say you want customers to get a 10% discount on their 10th shake or after they have spent the equivalent number of pre-requisite shakes. Each shake costs $10. In other words, to get the reward of 10% off, you want customers to pay $99, ie (9 times  X  $10) + (1 time X $10 at 90%). 

Redemption value X (Total spend value in cash X 100 to convert to cents)

1 X ( ($10 X 9 times) + ($10 X 90% X 1 time) ) X 100 to convert to cents)

1 X ($99 X 100 to convert to cents)

9,900 points

Customer Perceived Value of Points (& Competition)

As with any form of pricing, the cost method (discussed so far) should not be the only approach. It is worth considering the extents to which your customers perceive value in your rewards and how your rewards compare with the competition.

Consider the redemption value used by your direct competition. After all, if your rate is 1% while that of competing brands is much higher, your offering is unlikely to appear attractive. In such cases, your competitive advantage will be qualitative, maybe the mascara below is as cheap as it is because of the relatively inexpensive ingredients and formulation shortcuts used. If your product is natural, the natural benefits will need to be stressed because you may have no way of competing on price.  

Example: If your competition awards 100 points for mascara whose regular sale price in cash is $21, the redemption value is as follows.

Redemption Value = (Sale Price in Dollars  X  100) / Reward Price in Points]

($21 X 100) / 100 points = 

2,100 cents / 100 points =

21 cents or 21%

Other ways of competing is by offering a wide range of rewards options from which your customers can find something that they value. If you can, cover costs like shipping, taxes and so on.

Conclusion

To get started, consider using 1% back on purchases and set your rewards up so that points are worth 1 cent each. This is also easy for your customers to understand. As you gather intelligence, you can adjust the value of loyalty points to accomplish your brand’s goals.

CONTENT RELATED TO REDEMPTION VALUE OF LOYALTY REWARDS POINTS

• Why the old 'earn and burn' loyalty program model is failing and a new approach for modern consumers.
• Tiered loyalty programs
• Use spend-based loyalty rewards programs to give greater rewards to customers with the highest customer lifetime value (CLV) ... and reduce costs while you are at it.
• A great loyalty rewards program can not help your business if customers can not understand it sufficiently well to sign up. Create a loyalty rewards program explainer page.
• Emotional advertising; deeply personal emotional triggers
• Measure the success of your loyalty rewards program.
• Incorporate a referral program into your loyalty rewards program. These 2 types of program complement each other. While the loyalty rewards program seeks to retain customers, referral programs seek to acquire new customers.
• Brief overview of loyalty and evangelism as they relate to the sales funnel.
• The value of points in the airline industry.
• Analyze how well your rewards catalog has been curated