COLLOQUY Corner: Redemption Equals Loyalty
As we continue our monthly survey of Loyalty 101, it’s important to pause for a moment to discuss the most enjoyable aspect of loyalty program design: redemptions. After all, the privilege of redeeming for rewards is the reason your customers join your program in the first place. Although reward fulfillment is usually the single greatest—and most variable—expense in your program budget, robust redemption rates are also a sure sign that your program is having a positive effect on your membership. Redemption equals loyalty.
Every loyalty program requires a redemption mechanism, and there are several ways to approach redemptions. Here are a few of the most common approaches:
Auto-issue certificates
A simple certificate system is the easiest way to accommodate the redemption process for in-kind rewards. Once members reach a specified level of spending, you can automatically issue paper certificates that entitle them to their awards.
Certificates are like money, however, and you should include such fraudproof procedures as unique printing, unique certificate numbers, and database tracking. Some point-of-sale systems can scan certificates and append the date, time, and amount of the redemption to your database, just as if it were any other transaction. In the worst case, you can do it all manually. Many merchants have eliminated paper certificates altogether and use an electronic stored-value gift card to facilitate redemptions.
You can mail certificates to members or make them visit you to retrieve them. Denominations will vary based upon your program earning rate; members will obviously earn smaller-denomination certificates faster than larger ones, which thus drives redemption to occur earlier and more often—but that means more issuance and handling costs. I suggest a two-tier approach: Offer the choice of a low-value certificate or a higher denomination, perhaps twice the amount of the lower one.
Certificates should contain an expiration date: use it or lose it. Expired and lost certificates result in breakage, which acts as a source of revenue to offset the funding costs of your program. Hence, you shouldn’t be sad if all certificates issued don’t come back to you. But breakage can be a trap: If your expiration dates are too aggressive, then your breakage will be high and your costs lower, but members who don’t realize any benefit in your program will lose interest in it. That’s a formula for failure.
On-demand redemption
You can issue rewards one of two ways: You can issue them automatically once members reach behavior thresholds, or you can allow benefit to accrue in member accounts until the participants redeem at their request–once members earn enough currency to qualify for an award, they simply request it from you. You check the database to confirm the balance, debit the account, and issue the award. You can issue the award on the spot or issue a certificate, depending on the nature of the reward.
Once again, all benefits should carry an expiration date. For accrued benefits, there are two basic types of expiration dates: fixed dates, which are based on your program objectives and the observed frequency of behavior in your membership, and frequency dates, in which all benefits expire unless members transact within a fixed period of time.
Breakage is typically higher in on-demand redemption models. Some members never accrue enough benefits to justify an award. Once the expiration dates comes, these benefits are wiped out of the member account. It’s a self-filtering mechanism that ensures that low-value members purge themselves from your program.
On the other hand, on-demand redemption requires a reward catalog listing the redemption options available to members—and issuing updated catalogs takes both money and time. Whether your catalog is a two-page brochure or a 50-page book, make sure to include it on your program Website; also include in your enrollment brochure information on where members can find the catalog. Accommodate on-demand redemption on site, by phone, or via the Website. Add and delete rewards from the catalog over time to keep it fresh.
Partner redemptions
Partners add excitement to your rewards catalog and help fund your program. Partners enjoy access to your membership for acquisition costs lower than what they normally incur; you enjoy added reward value at a cost lower than the perceived value; your members enjoy reward variety, which spurs participation and allows them to select the most appealing rewards. Everybody wins.
If you’ve successfully recruited redemption partners to join your program, then you’ll need to establish redemption processes. Paper or electronic certificates commonly facilitate this process. Partner redemption is almost always on-demand; members choose which partner reward they want once they’ve earned enough benefit to qualify.
Once a member requests a partner reward, you debit the account and issue a mechanism for retrieving it. This mechanism must be fully integrated with your partner’s system. Your partner must then track its acceptance and report back to you the unique data associated with the order (number, date, item, etc.). Upon receipt, you send the partner a check for the agreed-upon price of the reward—which should be lower than its perceived value.
The end game
Some loyalty programs combine all three of these basic redemption systems. As always, which systems you implement will depend on your program’s goals and budget. Certificates are the easiest and least expensive redemption mechanism available. On-demand redemption motivates members to accrue benefits and aspire to do more business with you. Partnerships allow you to build value into your program without breaking the bank.
No matter which system you choose, remember that redemptions are a good thing. Reward redemption is a powerful mechanism that drives retention, increases your share of customer, and builds loyalty to your brand—the end game of all successful marketing plans.
Rick Ferguson is the editorial director for COLLOQUY, a provider of loyalty-marketing services. COLLOQUY teaches an ongoing series of loyalty marketing workshops and seminars in conjunction with the Direct Marketing Association. For more information, visit www. colloquy.com/cont_conferences.asp.
Other articles by Rick Ferguson:
Dialogue, the Coin of the Realm
The Customer, Not the Payment Type, Is King
The Yin and Yang of Loyalty Marketing
