How to choose the right discount or point value for your loyalty program
Building an effective loyalty program is a strategic way to increase customer engagement, boost repeat purchases, and create long-term brand advocates. Determining the right discount and reward values is essential to maintaining a profitable program that aligns with your business goals. This article provides a quick guide to identifying the most suitable reward values, ensuring your loyalty program remains competitive and beneficial for you and your customers.
IN THIS ARTICLE:
Understanding customer behavior
Identifying customer segments and their needs
Exploring competitors to find gaps or opportunities
Identifying your costs and minimum acceptable margin
Identifying the cost of rewards in dollars
Converting dollar value to points value
Understanding customer behavior
A successful loyalty program starts with understanding how customers interact with your business. Analyze data such as:
- Purchase frequency: How often do customers shop with you?
- Average order value: What is the typical amount spent per transaction?
- Churn rate: How long do customers remain engaged with your brand?
Gathering this information helps you tailor a loyalty program that resonates with your audience and meets their expectations.
Identifying customer segments and their needs
Segmenting customers based on purchasing patterns helps tailor rewards that resonate. Customers are motivated by perceived value — the balance between the reward and the effort required to earn it. If rewards feel unattainable, engagement drops, while overly generous rewards can make your program unsustainable.
For example, frequent shoppers might prefer discounts, while occasional customers might engage better with free shipping offers or exclusive products.
Exploring competitors to find gaps or opportunities
Analyze your competitors’ loyalty programs to uncover strengths and weaknesses. Look for:
- The types of rewards they offer (e.g., discounts, free products, or exclusive perks).
- Point-to-dollar conversion rates and redemption thresholds.
- Actions rewarded, including transactional and non-transactional behaviors.
Identify gaps or opportunities where your program can stand out, such as offering unique rewards or more flexible redemption options.
📖 Customize Growave’s point-earning rules and redemption options to optimize your loyalty program.
Exploring industry standards
Review industry benchmarks to guide your program. Below are three examples of loyalty program point value calculations:
Example 1: Sephora Beauty Insider (Retail)
- Earning points: $1 spent = 1 point.
- Redeeming points: 500 points = $10 reward.
- Point value: $10 ÷ 500 points = $0.02 per point.
This program provides a relatively higher point value, emphasizing quick, tangible rewards to encourage frequent purchases.
Example 2: Hilton Honors (Hospitality)
- Earning points: $1 spent = 10 points.
- Redeeming points: 10,000 points = $50 hotel stay discount.
- Point value: $50 ÷ 10,000 points = $0.005 per point.
Hilton Honors offers a lower point value but compensates with high earning rates, creating an aspirational feel for customers working toward significant rewards.
Example 3: Starbucks Rewards (Food & Beverage)
- Earning points: $1 spent = 2 stars (points) if funds are added in the app and payments are made from the app.
- Redeeming points: 100 stars = a free drink, pastry, or slice of cake (valued at $5).
- Point value: $5 ÷ 100 stars = $0.05 per point.
Starbucks provides a high point value for app-based payments, encouraging customers to preload funds, which benefits the brand through cash flow while driving loyalty through frequent rewards.
This demonstrates how businesses can tailor point redemption to align with customer expectations and encourage specific behaviors while maintaining a consistent point value.
Identifying your costs and minimum acceptable margin
Profitability is key when assigning point values. Calculate your costs, including product cost, handling, shipping, and administrative expenses, and determine the minimum acceptable margin for your business. Use the following table as a guideline for discount rates based on profit margins:
| Profit margin | Suggested discount rate |
|---|---|
| Less than 30% | 5–10% |
| 30–60% | 10–15% |
| Greater than 60% | 15–20% |
Using the insights from customer behavior, segment analysis, and competitor benchmarking, calculate the maximum discounts your program can sustain while remaining profitable. Ensure that discounts align with customer expectations and provide value without eroding your margins.
Identifying the cost of rewards in dollars
Rewards can be transactional (e.g., purchase-based) or non-transactional (e.g., reviews, social shares). Estimate the dollar value for each action based on its contribution to your revenue:
- Transactional actions: Calculate the reward as a percentage of the average order value. For example, a $50 purchase with a 10% reward rate equals a $5 reward.
- Non-transactional actions: Estimate the value of behaviors like reviews or social shares using industry benchmarks:
- Writing a review: $3–6 in long-term value.
- Social sharing: $3–6 per share.
- Following on social media: $5 in increased lifetime value.
Converting dollar value to points value
Once you’ve determined the dollar value of an action, convert it into points using the following formula:
Formula 1: Dollar value to Number of points
Dollar value of reward ÷ Point value ($) = Number of points
Example: $5 ÷ $0.01 = 500 points
Formula 2: Point value
Dollar value of reward ÷ Points required to redeem = Point value
Example: $5 reward ÷ 500 points = $0.01 per point
Multiplying the point value by the total outstanding points, you can assess the financial impact of your loyalty program and make adjustments to ensure sustainability.
Testing and optimizing your loyalty program
A successful loyalty program requires continuous testing and optimization. Use Growave’s reporting tools to track key metrics such as points redemption and discount usage rates. Sometimes even small adjustments can significantly impact your program’s success.
For instance, if redemption rates are low, consider lowering the threshold for rewards or increasing earning rates. Similarly, if certain rewards are cutting into profits, adjust their cost or availability.
Growave’s Points program analytics provides key metrics for evaluating your points program’s performance, including:
- Outstanding points: Total points earned but not yet redeemed.
- Redemption rates: The ratio of points earned versus redeemed.
- Revenue generated: Revenue from the points program.
- Discount usage rate: The rate at which active discounts are used.
📖 Learn more about the Rewards program analytics in Growave
By filtering data by periods, you can better understand the impact of your loyalty program and make adjustments to improve its performance.
Conclusion
Designing a loyalty program involves careful consideration of customer behavior, competitive benchmarks, and profitability. By following these steps and leveraging the provided formulas, you can create a program that rewards customers effectively while driving long-term growth for your business.
If you have any questions or need assistance, please don’t hesitate to contact our support team at support@growave.io or via the chat icon in the right-bottom corner. We're here to help! 🤗