When and how to create obstacles in a loyalty program

Although rewards programs are designed to save customers money, most also include some form of barrier to redemption: policies such as minimum spend or expiration dates that limit clients’ ability to actually experience program benefits. These obstacles can be very frustrating, but new research suggests that if configured correctly, they can also be beneficial for businesses and their customers. Specifically, reimbursement barriers allow businesses to effectively segment their customers’ prices, allowing them to meet the needs of more customers. To do this, companies can leverage industry market research and past purchase data to set barriers that will separate customers into groups based on how often and how much they are likely to buy. Additionally, companies should make sure to clearly communicate the rules of the program to avoid surprising customers. With this approach, companies can design rewards programs that will maximize both profits and customer satisfaction, creating more value for everyone.

Have you ever signed up for a rewards program only to find months later that your points expired before you had a chance to use them? If so, you are not alone. Research shows that loyalty program members lose up to a third savings that they could have realized through these programs due to obstacles to redemption: policies such as expiration dates, minimum spend, and other requirements that prevent customers from actually enjoying the benefits of membership.

These barriers to redemption are extremely common. In fact, we conducted a investigation with the top 100 US retailers and found that 85% of the rewards programs offered by these companies included some form of barrier. For example, many airlines and hotel chains stipulate the minimum number of points required for a free plane ticket or one night’s stay, and they forfeit members’ miles and frequent flyer points after a period of inactivity. These types of policies may entice customers to spend more, but they also have been quoted as a major source of frustration for customers, and may even cause some to cancel their subscription. Is it possible for companies to reap the benefits of integrating redemption barriers into their rewards programs without alienating customers?

To explore this question, we constructed a economic model to determine the impact of barriers to redemption on customers’ purchase and rewards redemption decisions. We also analyzed key features of the top 100 US retailers’ rewards programs and conducted a series of in-depth interviews with senior executives to better understand how real-world companies implement these programs, what tends to work. and what does not work. t. These analyzes have demonstrated that reimbursement barriers can in fact be a win-win for businesses and their customers, but only when set up correctly.

Reimbursement barriers allow for effective price segmentation.

Specifically, we found that barriers to exchange can provide a mechanism for retailers to effectively segment their customers’ prices in contexts where it is impossible to list different prices, ultimately allowing for more matching. close relationship between company offerings and customer needs. To do this, companies may use past purchase histories, survey results, or other market research data to determine where their customers stand. willingness to pay (i.e. how much they are willing to spend) and purchase frequency (i.e. how often they are likely to make a purchase). Once the company has an idea of ​​the ranges of these two key metrics, it can create redemption barriers that divide customers based on how often and how much they spend, meaning these different customer groups will be charged different effective prices.

For example, if a coffee shop rewards its members with a free cup of coffee for every four cups purchased within a certain date range, the effective price per cup paid by a customer using the reward will be approximately 20% lower than that of a customer whose rewards points expire before reaching four cups. The refund hurdle allows the company to offer a lower effective price to unwilling to pay customers who make frequent purchases, while charging a higher price to unwilling to pay and less frequent buyers.

Conversely, if the store chooses not to use an expiration date, it will actually set the same price for all customers, which means either it is pricing customers who are unwilling to pay, or ‘it leaves money on the table by failing to charge as much as very willing customers would be willing to pay.

Of course, this only works if you set the right redemption thresholds – and the optimal thresholds will depend on both your industry and your specific customer base. In general, the more frequently customers purchase your product, the shorter the expiration time should be. For example, most people buy groceries every week, but they only fly a few times a year, which is why grocery stores tend to set much shorter expiration times than airlines. aerial. Indeed, this is confirmed in our data: among the top 100 US retailers, the average expiration time for grocery store rewards points is around a week, while specialty stores such as GameStop and Dick’s Sporting Goods give you up to one year to use your points.

But it’s not just about average purchase frequency. Our analysis also demonstrated that if customers vary widely in their purchase frequencies, businesses will benefit from a shorter expiration time, while if customers have similar purchase frequencies, a longer expiration time. long is more advantageous. This is because it is more difficult to segment customers when their purchase frequencies are more similar, and as such a longer expiration time is needed to effectively separate them into meaningful groups.

Barriers to takeover can be a win-win, but only if they are put in place correctly.

To be sure, there are still potential risks associated with redemption hurdles. First, our analysis has demonstrated that they can be mutually beneficial if configured correctly, but they can also backfire if expiry conditions or other thresholds are not optimized to meet the needs. client. For example, when the carpooling platform Didi spear a new rewards system in which drivers had to complete more than 30 trips per week to unlock the benefits associated with top status, many complained that this reduced take home pay and encouraged unsafe driving practices, ultimately pushing drivers drivers to competitors’ applications.

Second, as with any customer segmentation strategy, your ability to design effective redemption barriers will depend on your access to data regarding the past behavior of individual customers. That said, we’ve found that barriers can be effective with even minimal insight into customer preferences, and some companies have had success with programs based solely on an analysis of the general makeup of their market, without individual-level information. about their customers. ‘ actual purchase frequencies or willingness to pay. While many personalization efforts require a lot of personal data, redemption barriers can essentially offer a shortcut, giving businesses many of the same benefits without the need for costly investments in collecting and protecting customer data.

And finally, even if the program is well designed, poor communication can be a major stumbling block. To avoid frustrating customers, companies should explain reward program structures clearly and transparently, and avoid jargon, complicated rules, or fine print. For example, the Old Navy rewards program recently came under fire to be unnecessarily complex, confusing and irritating to loyal customers.

Likewise, companies should ensure that members are fully aware of the expiration terms and that they receive sufficient reminders before their points expire. For example, many hotel chains in our data had expiration times of 24 months, but they started sending monthly reminders at 12 months, then switched to weekly notifications over the last two months (these reminders not only reduce the risk of surprising customers with lost rewards, but also increasing the chances that they will make a purchase, again creating a win-win). Some chains would also offer customers options to redeem their points in other ways if they did not need a hotel room before their points expired, such as buying merchandise or gift cards, donate or extend the expiration date, further boosting customer confidence and satisfaction levels.

Ultimately, there is no perfect design for a rewards program. But with an intentional, data-driven approach, companies can create barriers to takeover that are a real win-win, creating substantial value for companies and their customers.

Abdul J. Gaspar