Redemption ecosystems: beyond the loyalty reward catalog

Flexibility around loyalty redemptions is crucial to creating meaningful value for every customer. Rewards that are interesting for less-frequent customers, as well as to frequent customers, motivate every customer to engage more, and increase the share of wallet that they allocate to your brand.

Reward catalogs, and the redemptions included, generate this motivation via the merchandised and shoppable experience of a commerce environment. What is strange today, is that most brands have evolved their public-facing ecommerce platforms into dynamic, content-rich, and personalized shopping experiences, while their loyalty program redemption catalog may not have changed in ten years, leaving it looking static with minimal appeal.

Customers notice this discrepancy and it directly affects their desire to pursue many of the rewards on offer.

This is really important, because the lifetime value of a customer that reaches a reward soon after joining a loyalty program, or if one sees they are making good progress towards something aspirational, is typically dozens of times higher. Those who struggle to accumulate sufficient points; meanwhile, eventually become inactive.

Because many brands spend so little effort defining the mix of options in their reward catalogs, the investment in acquiring new members is often wasted. If customer engagement falls off, it becomes exponentially more challenging to influence behaviors among the majority of customers.

In retail and fuel programs, lower-value redemption offers are often readily available, but comprise little more than discounts on current or future purchases, which carry little emotional appeal.

In travel programs, redemption options are usually assembled for the most active loyalty program members – who are typically frequent business travelers – with few, lower-value options that appeal to those members who earn only once or twice per year.

This article describes how those leading a brand’s loyalty program need to think beyond a static reward catalog. In a more digital world, the rewards and incentives can actually comprise a dynamic ecosystem, involving partners that want to help you deliver excellent value to customers. The key is offering something motivational for nearly everyone, while keeping operating costs under control.

This is also an important step in establishing yourself in new global marketplaces where customers now spend the majority of their time, and where you have the opportunity to enhance brand visibility at moments in customer journeys that trigger reinforced loyalty.

The ‘four M’s’ that enable loyalty redemptions

Few professionals think deeply about the characteristics of a reward catalog, and why they are important in driving customer engagement. Let’s summarize a few key dimensions – which can handily be remembered as the four M’s that optimize a customer’s journey toward redemptions.

Motivation. The purpose of a reward catalog is to offer your customers the right mix of products or services so that nearly every customer can get highly motivated to earn one or more rewards.

A formula I started using many years ago helps evaluate how much motivation can be created:

Motivation = Perceived Value of the Reward * Likeliness of Earning It * (1- the effort)

This formula implies multiplying the variables to achieve the result.

If any of these numbers are low, then the motivation is low. For example if…

a trip to London has a perceived value of 0.9
and the likeliness of accomplishing the necessary ‘earn’ actions is also high at 0.7
but the effort is also high (perhaps 1-0.8 = 0.2)

…then despite the other high factors, that 0.2 still results in a low level of motivation (in this case, 0.126 on a range of 0 to 1).

A less interesting reward might have…

a perceived value of 0.7
but a high likelihood of success, say 0.95
and a modest effort of perhaps 0.25 (i.e., 1-0.25 = 0.75).

Even though the reward is less interesting, the motivation for that reward is still relatively high: 0.499.

If you make it really easy to achieve great rewards, your program will lose a lot of money, so a 0.499 score may be about right.

If the reward catalog is full of uninteresting things, or it is too hard to win, your engagement level will fall off very quickly.

For example, in the Plenti program in the USA, I joined because they were promoting a fantastic prize for 120,000 points. After I spent over $200 on gas at ExxonMobil and some burgers at Chili’s, found out I had earned about 400 points. This made me quickly realize that I would need to spend about $60,000 USD among Plenti partners to reach the reward – so I quit.

The Mix. There needs to be something for every customer segment you want to engage

Some segments will spend a lot of money with you, so valuable, aspirational rewards should be available to these people (which might be recognition through a tier program – and not an actual product).

Some people spend less in your category – but they are still valuable as a group, because their combined expenditure adds up. Furthermore, infrequent customers are also important because some of them do spend a lot in your category without you knowing – while others can influence their friends and family to engage.

There needs to be something interesting for these infrequent customers in the mix, even if they only spend $500 per year. If there isn’t, they won’t join your loyalty program, and you lose the opportunity to analyze their data in a growing number of countries/states with privacy legislation, as well as the opportunity to market directly to them.

Merchandising. The rewards need to be merchandised so customers are aware of what they can get.

Imagine a grocery store. Their product selection and placement are optimized for frequent customers in their target segments. However, they also offer a wide selection of goods that their best customers buy on occasion, while ensuring the selection is broad enough that nearly every customer can meet their needs when entering the store. Those grocery stores that are winning get larger basket sizes from all types of segments, and increase frequency with customers who had been sporadic.

In a physical store, shelf space is limited. In a digital redemption ecosystem, with drop-ship suppliers and potentially infinite digital goods, you should be able to appeal to everyone with items of high interest – but you can’t promote 100 rewards to every member. This is where personalization comes in, allowing you to promote a handful of prizes to specific segments to generate excitement. Less-personalized promotion can also be done in stores or via partners to keep the customer striving for their goal.

The dependency on a static reward catalog prevents your brand evolving towards the optimal setup: a dynamic redemption ecosystem which is not restricted to a single environment. In such an ecosystem, customers can burn at any touchpoint, with any partner, and a team member can enable new redemption options with a few clicks of a mouse and no dependency on the IT department or a vendor.

With modern technology, you no longer need to resemble a grocery store; it is eminently possible to work towards a dynamic redemption ecosystem.

Management. Relationships with suppliers, partners, dealing with customer issues, accounting, etc, needs to be proactively managed to optimize ROI.

Managing a type of storefront where customers can shop for redemption options and pay with points can be a small or big business activity in its own right. The management typically involves procuring the inventory, maintaining the redemption store, and the logistics to deliver to customers – or at least the management of a 3^rd party that completes these things for a modest – or sometimes high fee.

Now in my experience, some brands still send quarterly or annual mailers with some highlights, but most of these reward catalogs are presented to customers via websites or apps. Those storefronts are typically a software module provided by the loyalty system vendor – and that functionality is usually the component in which they have invested the least. Therefore, most reward catalogs look like ecommerce stores from 2005.

In comparison, many brands’ commerce platform for the general public has probably been refreshed every year or two with modern technology, new content, and new inventory. It often has a great CX and UI.

When customers compare the public store to the loyalty store, they think – Does this brand really care much about customers actually getting the rewards?

Motivation, Mix, Merchandising, and Management are the key characteristics of any loyalty commerce solution. It requires some thought and effort to create appeal for customers, but the investment is well worth it. Upgrading to modern ecommerce software can also make the ongoing management much easier. And, this effort gives you leverage because assembling the rewards in a compelling way influences the majority of customers.

In many cases, operating the redemption function was hard 10 years ago – and therefore outsourced to a 3^rd party, but now can be done easily with modern technology. You might even use your primary ecommerce engine to rebuild the storefront into a redemption ecosystem.

Redemptions via direct partnerships are most profitable

Third-party reward catalogs are an ‘easy’ solution for brands looking to provide a modest range of rewards in their loyalty program. But like most ‘easy’ solutions, they are only partially effective. In 2021, traditional reward catalogs may actually be counterproductive to your customer experience.

Managing your own, open redemption ecosystem means you can now enable complementary partners to offer their goods and services to your customers – often at very attractive wholesale cost. This is especially powerful with distressed inventory because your real cost is what you would have had to sell it for to liquidate the inventory, or simply the variable cost associated with the goods.

What is kind of magical is that the most aspirational goods and services tend to have high margins and have a perishable nature – i.e., if not used when available, they have almost no value. These include:

hotel rooms that would go vacant
spa treatments when staff and facilities are available but there’s no customer demand
tours or museum visits
restaurant capacity

These all have high perceived value, but if not consumed, they generate no incremental revenue. For that reason, you can often get partners to give you a good deal on distressed inventory that has high perceived value to your loyalty program members. This is magical because it enables you to make your points look 3-5 times more valuable than their cost.

Airlines and hotel groups are masters at this. They make it attractive to redeem for rooms or seats that will not be sold – so the customer’s perceived value is very high, but the cost to clean a room, or put another body on a plane is very low. This means points that look like they are worth 2 cents to the customer, have a cost of .2 cents to the loyalty program.

Most brands, however, can’t do this alone. When your markup is only be 20-30%, rather than 80%, and when your inventory may never become distressed in the same way as an airline seat, you have little opportunity to work the ‘magic’ of loyalty rewards. You must therefore find suppliers of high-margin services (tours/activities, concerts, spa treatments, etc.), who will let you fill their excess capacity with new customers (your members), and who are likely to charge you only 20-25% of the street price of the services.

The classic example is Tesco – typically operating on 10-15% margins. A Tesco Clubcard member can obtain a £7.50 voucher for Pizza Express (an affordable family restaurant) for only 250 points (£2.50 of perceived value) which delivers a huge step-up in perceived value. And Tesco probably only pays Pizza Express about £2 for those vouchers. This is fine with Pizza Express, because those customers who come in with the voucher bring friends and probably pay £50 for the entire meal, which costs less than £20 in variable cost to Pizza Express.

Similarly, Vodafone, a UK telco, offers redemptions such as two cinema tickets for £7 via its loyalty app.

The other way to influence perceived value is to dynamically alter the monetary value of your loyalty currency.

For the sake of argument, let’s say your points are normally worth 1 cent. Allowing the points to only ever be worth 1 cent is a big mistake.

The reason it’s a mistake is that the cost of your points should have already been written off as a cost of sale when the points were issued – so you should be indifferent as to how that loyalty currency is spent. What you should care about is that you are managing opportunity cost versus the liability of the points on your balance sheet. If you really need to shift distressed inventory, you could allow the monetary value of the currency to equal the inventory’s direct cost only, and forgo all your margin. That’s how a hotel room listed at $3,000 for the week might be given away for only $300 worth of loyalty currency – since even $300 is incremental revenue.

If you could sell the goods to a customer for cash, then if a customer wants to use points, they should pay more dearly.

That’s why points burned against really popular flight times confer such poor value. In these cases, the customer is better off paying cash and saving the points for another day. But, if the customer really does want to burn on that occasion, that’s great news for everyone. The consumer avoids spending some of their fiat currency, and the loyalty liability you’ve removed, exceeds the sum you could have generated from a sale.

Burn touchpoints in a redemption ecosystem

The implication of a rewards ecosystem, as opposed to a rewards catalogue, is that no specific environment is needed to burn loyalty currency. Rather, any transactional or non-transactional touchpoint could become loyalty-enabled as a way to enhance the customer experience, reduce your brand’s points liability, or to produce useful customer data.

This sounds like it opens up an infinite range of possibilities, and that may be intimidating – but actually, brands should continue to be selective about where their loyalty currency can be burned, and there are snippets of industry best-practice already in the market which show you were to start.

These touchpoints might include…

Enabling ‘pay with points’ on your own inventory

Some brands allow customers to burn points as a way of offsetting the fiat cost of their purchase.

A well-known example is British Airways. The UX isn’t perfect; unless you’ve logged into your Avios account with the intention of burning points, you may not notice the ‘Save with Avios’ message – right at the end of the booking process. You’re far more likely to notice that you might be able to redeem a cash coupon against your order (see top right).

A less-frequent customer, who hadn’t anticipated burning points on that occasion, may well check out without realising that they are leaving value on the table.

Burning points against your purchase should be as intuitive and easy as any other transaction; the brand should simply alter the points value so that it creates perceived value for the customer and favorable profits for the business.

Enabling burning at your partners’ points of sale (POS)

This should be no more difficult than burning against your own inventory, as long as your partner has also adopted the technology needed to enable points to be spent in real-time. The transaction in your partner’s ecosystem should simply trigger an API call to your loyalty system and initiate a real-time exchange of your currency for the partner’s fiat payment. This can be challenging if partners have many different POS systems, but loyalty commerce platforms like Currency Alliance make it easy.

Your partner will be delighted, because they may not have captured the sale otherwise. And you should be delighted also, because by virtue of that transaction, you’ve enhanced your insight into that customer’s behavior and reminded them of the value of your loyalty program.

Allowing customers to exchange into their favorite loyalty currencies

When a customer converts from one currency into another, they’re effectively burning on points in the same way they’d burn on any other redemption.

This is actually the simplest burn option to add to your redemption ecosystem, since the customer will be relying on your partners’ existing burn options. You simply need to create a screen for the customer to carry out the transaction.

Enabling these kinds of exchanges used to be difficult; Currency Alliance’s exchange platform makes it simple. Two brands can forge such a partnership in minutes (or in a few days, if they’ve not yet integrated with Currency Alliance’s API).

Enabling redemptions at non-transactional touchpoints

That might include being able to gift points to customer service staff, as a thank-you for great service. In B2B loyalty, it might help you market services which people may hesitate to pay a fiat currency for – such as an elevated position in your marketplace, or featuring in a company newsletter. Enabling customers to spend points to attend a special event, participate in a contest, or obtain other services can also be quite attractive.

If this happens, your CFO should be delighted, because that points liability has disappeared without spending a penny on inventory.

All of these tactics lend unique value to the brand and the consumer alike; as a result, most major loyalty programs deploy a few of the above, to a certain degree.

The tech: how to evolve into a rewards ecosystem

The evolution towards a modern redemption ecosystem will be made up of a number of individual steps, which are outlined below.

These steps are ranked from simplest to most challenging – but it should not be that difficult to get started on any of them. Nor do you need to scrap your existing reward catalog; it can run in parallel until you’ve settled on the perfect formula.

1. Partner with brands which can provide aspirational experiences at low direct cost

You don’t need to start with thousands of partners. As our article on partner loyalty explains, simply asking your customers which brands they’d like to burn on would be the best way to get started. 5-20 well-picked partnerships would be enough to instantly see increased engagement in your loyalty program.

This can be achieved in a matter of days whether or not you have a points-based program, since you can offer gift cards from your customer’s favourite brands. If you’re new to partner loyalty, this is actually one of the most efficient ways of getting started. Currency Alliance’s Global Loyalty Marketplace has over 4,500 gift cards available in over 60 different fiat currencies.

Gift cards have high, immediate utility, and they are flexible. For example, customers with family members in India might want to redeem for popular gift cards in Indian Rupees and send the gift cards to a family member.

2. Enable the greatest possible freedom in redemptions

Ideally, your customer should be able to burn at any transactional touchpoint – whether that’s with you, or with your partners – and also at the non-transactional touchpoints that you enable.

If the transaction is in your own branded environment, you’ll need to integrate your transactional customer experience (CX) with your loyalty platform so that the customer can ideally see the ‘pay with points’ price and consider whether they want to burn. That will also allow you to adjust reward pricing if the profitability of that redemption fluctuates (based on availability, or on the customer’s profile) in order to maximize your chances of a desirable outcome.

In your partner’s environment, the partner’s platform would need to make an API call to your loyalty system in order to authenticate the member, check they have enough points, and complete the redemption transaction when the customer completes the purchase.

Currency Alliance was founded to make these kinds of partnerships effortless. Each brand can integrate their digital environments via Currency Alliance’s Global Loyalty Marketplace in a matter of days, and forge partnerships in minutes. You simply set the price for the value or exchange of your points and design some small changes, into the screens of your respective CX, to allow the customer to burn.

Such flexible technology also gives you the ability to support non-transactional touchpoints quite easily. For instance, if the customer would like to reward your shop floor staff with some points as a thank-you for great service, perhaps your staff IDs would carry QR codes which the customer can scan with their phone. This could also happen during a telephone call if the customer called via their app (now commonplace in consumer banking). If your customer service systems were also integrated with your loyalty program, the touchtone keypad could even be used, since the customer will likely have been logged into the system during the call.

3. Make it personal

The above two improvements will add significantly more variety to your redemption ecosystem, such that many customers may quickly feel that your loyalty program has become a lot more personally relevant to them.

The next step is to start taking advantage of your customer data, in order to tailor customer experiences based on individual preferences.

A sign of how competitive this space is becoming surfaced this month, as Kroeger, a US grocer, effectively turned its digital ecosystem into a supply-side programmatic media platform. The supermarket has translated ‘decades of trusted consumer relationships’ into what Cara Pratt, SVP Kroger Precision Marketing, refers to as ‘pre-assembled audiences’.

While the customer’s experience of programmatic ads has historically been poor, the power of the tech – to target ads based on data – has never been in question. Advertisers have simply never had the data to get it right. With the wealth of data available in a major loyalty program, backed up by customer consent, and powered by programmatic tech, Kroger’s customer can now expect to receive highly relevant offers from many different brands.

Of course, few of your burn partners – certainly not Pizza Express or a local theme park – are going to build their own supply-side platforms. But there are simpler ways to get started.

If you engage in a few, direct loyalty partnerships, you will quickly harness insights from those partners which can contribute to further personalization. Getting incremental customer data into your enterprise CRM will allow you to draw on the full wealth of customer insights in order to create more personal experiences.

4. Adopt headless, or API-first ecommerce platforms

API-first platforms enable much greater agility, as well as the ability to mix and match many other components of a marketing stack of software.

Loyalty systems are no different. They benefit from API-enabled functionality so that brands can configure touchpoints with customers across channels such as shopping websites/apps, on social media, in marketplaces not controlled by the brand, and via collaborations with partners.

As brands have embraced headless commerce platforms for their primary ecommerce channels, they have evolved to include greater personalization, much better content management, more streamlined customer journeys, and ultimately higher conversion. This is in stark contrast to many of the static reward catalogs that are effectively commerce platforms – leading to customers getting a great experience on the primary sales channels and increasingly dated experiences in the reward catalog.

Should you still operate an ecommerce catalog?

When I log into most loyalty programs to see what is available for my points balance, I see that most offers have not been compiled based on any of my spending data; rather, they are generic, pre-assembled offers which may appeal to the ‘average’ consumer (who, of course, is a fictional character).

This is all the more damaging in an age when customers are highly accustomed to personalised shopping experiences. To go from a main retail environment, where everything is tailored to my size, tastes, favourite colours, previous preferences, etc., to one where I feel ‘lumped in’ with millions of other people, feels like stepping back in time. As marketing personalisation improves, this step-down in the quality of experience is only going to seem bigger by comparison.

Improving on this is certainly achievable.

There was a time when setting up and running an ecommerce platform was expensive and required specialist skills. To be fair, it is still challenging to be great at ecommerce, but today, the technology and skills to operate an effective redemption ecosystem are within reach of most companies. These advances may save you 20% of redemption value going to a third-party vendor.

Many loyalty specialists have not heard much about ‘headless commerce’ platforms, but API-first and headless ecommerce platforms such as commercetools, BigCommerce, BloomReach, Elastic Path, etc. have really taken off in recent years. The principal reason is that a headless system allows brands complete control over the design and implementation of the customer experience (user interface), while the commerce platform takes care of all the complicated backend processing via API calls.

We believe that headless commerce platforms should also be used for the redemption ecosystem, but you could be more radical and get rid of the reward catalog altogether. Under this setup, brands should simply enable loyalty program members to search for rewards on the primary commerce platform, but then checkout and pay with points.

This may be a three- to five-year evolution in the industry, but the benefits from consolidating technology stacks, gaining agility, and lowering operating costs are too compelling to miss out on, so you should invest in understanding how these new technologies can benefit your customers and businesses.

Build your redemption ecosystem around your customer

Few of the recommendations cited in this document are quick wins; many of them are unchartered territory to most brands. Some will require integrations, testing and quality assurance before being rolled out to your entire customer base.

The ideas shared should, though, stimulate some reflection on whether the redemption ‘end’ of the customer journey is sufficiently compelling to keep loyalty program members earning in order to reach interesting rewards. If not, you have a leaky funnel that is negatively affecting customer lifetime value.

As marketing tools and best-practices evolve, today’s cutting edge will soon become regarded as out of date. But corporate inertia will doubtless hold some companies back, and that leaves ample opportunity for faster-moving teams to get ahead.

The right place to start is with your customer, and the insight you already have on their preferences.

Even if you get poor data from your existing reward catalogue supplier, you should still know which customers prefer restaurants, cinemas or family days out. That alone should give you a steer towards a your first few, directly-brokered ‘burn’ partnerships. If you don’t already operate a legacy redemption catalogue, you can get this data in other ways. Simply asking your customers would be the best place to start.

For too long, the redemption environment has been the tail that wags the dog: a rigid, pre-assembled collection of offers that in too many cases limits the appeal of your loyalty program. In turn, that reduces the size of your loyalty program membership and engagement level.

The examples provided in this article only scratch the surface of the possible innovations around loyalty redemptions. With such a wide range of possibilities, every brand should easily be able to identify its own, low-hanging fruit and quickly make small, but meaningful improvements to the customer’s ability to burn points in the way that’s most meaningful to them.

Evolve to a redemption ecosystem with Currency Alliance

Currency Alliance provides two of the five core loyalty modules – the points bank, and the rules engine – that allow you to choose where to issue points, for different kinds of customer actions.

Our software is designed to enhance your existing technology, so there’s no need to rip our your existing systems. It’s a thin, cloud-based layer which you can integrate with existing systems by connecting to our API in a matter of weeks.

We also have an out-of-the-box integration with commercetools, so that brands adopting commercetools as their headless ecommerce architecture can deploy loyalty mechanics at any ecommerce touchpoint with practically no effort.

Using our lightweight, cloud-based tech, it’s easier than ever to issue points or enable customers to burn at any digital touchpoint.

Learn about Currency Alliance’s headless loyalty platform here.