Building hurdles into loyalty programs

By now it’s no secret that properly designed and managed loyalty programs can unlock significant value. Top-performing loyalty programs can boost revenue from customers who redeem points by 15 to 25 percent annually, by increasing either their purchase frequency or basket size or both. So, if loyalty programs play a critical component in increasing company-wide sales, why would you want to insert hurdles into them?    

In reality, most loyalty programs have some redemption hurdles in place that limit a customer’s ability to reap their benefits.  

According to our Senior Director of Loyalty Consulting Andrew Herta, redemption hurdles enable companies to effectively price segment and control the cost of their loyalty program. With this approach, companies can design rewards programs that ultimately create more value by right sizing their offerings.  

A closer match between needs and offerings  

Redemption hurdles are limitations brands put on members' loyalty points, like redemption expiration dates, spending minimums or redemption windows. About 1/3 of all loyalty points are never cashed in due to redemption hurdles, and can be a major frustration point for consumers.

As Herta points out, "while companies must use hurdles as guard rails to control costs within their loyalty programs, they must be implemented in a balanced way to avoid creating negative member experiences. A successful program balances the value provided to the member with the cost of the program because at the end of the day, a loyalty program must generate incremental revenue."  

Redemption hurdles enable businesses to better price segment their members, which allows for a closer match between company offerings and member needs. To do this, firms can use past purchase histories, survey results, or other market research data to determine their members’ willingness to pay and purchase frequency. Once these two metrics are established, businesses can create redemption hurdles that split members according to their frequency and amount of spending.  

The optimal threshold does vary by industry. The higher the purchase frequency, in cases such as restaurants, the shorter the expiration term for rewards points should be as compared to specialty stores or airlines, for instance. If members have similar purchase frequencies, a longer expiration term for reward points may be more advantageous because it enables brands to effectively segment members into meaningful tiers based upon their spend. 

That said, a well-designed program is ineffective if the program is poorly communicated. It’s imperative that companies clearly outline the reward program structure, clearly communicate any expiration terms and avoid jargon or fine print that can lead to alienating loyalty program members.  

Who says hurdles are boring?  

Redemption hurdles don’t have to remain at set levels; in fact, adjusting them based on redemption elasticity can create a significant sales boost. As opposed to devaluing the loyalty program, lowering the price of redemption can activate dormant customer loyalty without any long-term impact. Overtime, reengaging customers can earn a brand deeper engagement.  

Not only can hurdles move, but they don’t have to be a snoozefest either. Gamification in loyalty programs is projected to grow to $30.7 billion by 2025 and is a clever way for brands to build up their first-party data. Gamifying redemption hurdles as part of the user experience can also increase engagement.  

Companies such as Nectar, the largest coalition loyalty program in the UK, saw a significant increase in user engagement in introducing a “scratch and win” feature on top of collecting points for every purchase. Alternatively, the Starbucks Rewards app has a “menu challenge” feature where members are issued a list of purchases to complete to win bonus stars. Bonus stars can then be redeemed against food and drink orders, or even merchandise. Such experiences create a psychological relationship between the loyalty program user and the brand, leading to higher retention rates.

Gamification can also soften the sting of redemption hurdles, Herta points out. For instance,  gamified elements such as sending a fun message that the reward is about to expire with the element of an extra perk if they redeem it in a certain amount of days helps encourage a member to redeem an award before said expiration date.  

Overall, “gamification should be integrated seamlessly into the larger member experience strategy, rather than on an ad-hoc basis," Herta underscores.  

Optimize and re-optimize 

Redemption hurdles are only one part of the larger loyalty program design which includes currency, thresholds, and ways to earn among many other factors. One goal of redemption hurdles is to shorten the time between member visits to increase overall frequency and spend. The key is to not make the redemption window too short as members are never going to want stricter redemption windows. However, while too much breakage is bad— meaning a reward that goes unredeemed⁠— having an expiration date that is too long discourages members from making incremental visits.   

"While it's important to include hurdles you must continue to optimize them along the way.” Herta emphasizes. Brands should always be looking for ways to optimize factors such as expiration windows and breakage points to encourage members to increment their behaviors.  

"Finding the right restrictions is key to driving the most incremental revenue. It’s a continuous optimization process that continues long after initial program design."   

It all comes down to the data  

The key to unlocking a loyalty programs success is having the right data to measure it. These beneficial programs create the data foundation for other valuable initiatives such as data-driven marketing and improving the customer experience. As with any customer segmentation strategy, your ability to design effective redemption hurdles depends on access to data regarding individual customers’ prior behavior.  

If you’re looking for help with your loyalty program, Epsilon’s digital strategy consulting expertise and technology enabling highly flexible solutions can help foster long-lasting connections. We’ve even garnered the top score in the Current Offering category. With an intentional, data-driven approach, firms can build redemption hurdles that create substantial value.