The Time Value of Loyalty

Why Redemption Rates Matter

Consumer behavior has changed dramatically over the past decade. Loyalty programs have not. You can walk down the street and find a coffee shop that still uses a punch card or check your email and find countless birthday emails with discount codes from your favorite brands.

Loyalty programs were once nice-to-haves, but now they are an essential component of a future-proofed business.

The Shifting Environment

Consumers are spending more time on their mobile devices than ever before. Brands understand this. With various digital channels and increasing competition for consumer attention, there’s a lot of noise.

How do brands break through that noise? By developing meaningful relationships with their customers.

For example, brands are now popping everywhere. As barriers to entry have been lowered to start and scale a business, it seems like every influencer and their cousin is selling their own t-shirts or gluten free dog treats.

The result? An increasing number of brands are all competing for the same advertising spots and consumer eyeballs. Customers aren’t becoming less loyal, but there are now endless opportunities for them to try something new.

So, it’s no longer “How often do you get in front of consumers?” but rather “How meaningful is your relationship with those consumers?”

Does the consumer think of your brand instinctively, or are you just one of the other thousands of brands all shouting into the void of paid ads?

More Data, More Complexity

Modern brands operate and communicate with customers across multiple ad platforms, their own organic social channels, email, online, in-store, and more. It’s nearly impossible to follow a single customer’s identity across each of these channels, especially ones owned by third-parties.

With a well-designed loyalty program, brands are able to collect and own data on their customers, while retaining a more holistic view of each customer’s behaviors & preferences.

So why doesn’t every brand have a loyalty program? Where are they falling short?

Customers Aren’t Redeeming Their Rewards

“Wait, you’re telling me unspent points are bad for the brand? I thought that’s just free money?”

Consider this shocking statistic — on average, 85% of brand loyalty points go unused.

While unspent points are technically assets on a brand’s balance sheet, the “true value” of those points are in the loyalty that they provide — the stronger relationship they create with customers.

In the same way that a stock is valued as the present value of its future cash flows, brands might value a customer in their loyalty program as the present value of future spend.

Imagine a fictional company with $1 billion in cash. They have no employees, no expenses, no revenue, and their cash just sits idle. Now imagine a similar company with only $500 million in cash, but they are a thriving business that produces $100 million in free cash flow per year.

Idle customers in a loyalty program are like the former — maybe their unused points are worth something to the brand today, the present value of those customers’ future spend is essentially zero if they’re not active.

On the flip side, active customers (those who are using their loyalty points) are engaging with the brand. They may have spent less to-date than some of the idle customers, but what’s important is their future spend. If they’re redeeming their loyalty points, they’re actively realizing the value of their membership, a reminder that turns into a habit, which leads to long-term retention.

Higher redemption rates lead to higher customer lifetime value

As customers realize the value of their memberships, they’re motivated to earn more rewards in the future. Idle customers might as well not have even joined the loyalty program if they were never going to return. This part is important because if customers go inactive, the brand must pay again to reacquire them, whereas the active customers don’t need to be re-bought — they’re already part of the community.

And we’re only referring to the transactional value of a customer! With a ~next-level~ loyalty program, customers can actually add non-transactional value to brands by taking actions that brands desire.

The Virtuous Cycle of Active Customers

Brands should incentivize customers to do what they want them to do and reward them with points, which then gives customers a reason to further interact with the brand and become a part of its community.

Customer referrals are a great example. When executed properly, referrals create a virtuous cycle that makes future customers brought into the program even more valuable, because they are essentially free to acquire (except for the minimal cost of the reward given to the referrer). It’s no surprise that many credit card companies will offer massive point bonuses for referring customers — because acquiring new loyal customers is expensive for brands to do themselves.

The cherry-on-top is that referred customers are 25% more valuable than non-referred customers, a testament to the authenticity of customers’ word-of-mouth.

Broadly speaking, low loyalty redemption rates are signs that customers don’t see value in the program. So what can a brand do to increase redemption rates of their loyalty programs?

How to Increase Reward Redemption Rates

For one, brands can offer more and better rewards. As we discussed in a previous blog post, rewards don’t have to be expensive (and they can be so much more than purely discounts). Surprise-and-delight rewards — where customers receive gifts out of the blue, more than they expected, or a chance at winning better rewards — are an effective way to excite customers.

As an example, let’s say a coffee shop offers a “mystery box” to customers every 3 visits. This mystery box could offer an array of benefits: like free drinks, bonus points, exclusive access to coffee classes, or free coffee for a month. Purely the fact that the reward was unexpected, and that the customer stands to win something highly valuable, excites customers and gives them a reason to keep coming back to the program.

Additionally, brands should encourage customers to both earn and redeem their rewards more frequently. The best way to do this is by making the shopping experience fun — maybe add in special time-sensitive promos, point multipliers, or other activities that keep customers thinking about the brand.

But there’s one simple word that designing a successful loyalty program boils down to.

Incentives, Incentives, Incentives

Customers respond to incentives. And what better way to incentivize customers to earn and redeem rewards than giving them actual ownership, or a stake in the brand’s success — the ability to sell the rewards they earn.

If a customer decides that they’re no longer interested in shopping with a particular brand, they should be able to cash in on the rewards they’ve earned (or their entire membership). And rather than the brand having to reacquire that lost customer (or find a new one to replace them), the old customer would now bring in a new customer by selling their rewards to someone else.

By giving customers ownership over their membership status, their incentives are aligned with the brand, creating stronger bonds and greater trust amongst the community.

Strong loyalty programs enable brands to shift budget away from paid advertising and reinvest it in their own customer base.

At its core, brands that develop closer relationships with their customers will have more engaged customers. More engaged customers will redeem more rewards, realize more value that the brand has to offer, and be more active members of a brand’s community. All of these lead to a higher customer lifetime value.

At Hang, we recognize that retention & engagement are the keys to the success of any business. We’re building a future where brands own the relationships with their customers, and customers own their status with the brands.

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