Why It’s Bad If Customers Don't Redeem Their Loyalty Points and How to Fix It

Loyalty programs, with their promise of rewards and benefits, have emerged as powerful tools for fostering customer retention and engagement.

However, the effectiveness of these programs hinges not only on their design and implementation but also on one crucial factor: point breakage.

What is Point Breakage?

Put simply, point breakage is the percentage of loyalty points that members don't use to get rewards or prizes from the brand. This also includes points that expire before members can redeem them.

For example, imagine Toni has 1,000 points in his account but only uses 500 for a reward she wants. Those remaining 500 points contribute to the breakage rate.

The average breakage rate varies depending on the industry. For example, Brandmovers reports that CPG retailers typically see breakage rates between 20-30%, while B2B brands and the travel industry can have rates as high as 70-85%.

While there's no one-size-fits-all standard breakage rate, it's important to pay attention if your program's insights show a rising percentage each month or tracking period. This could be a sign that something needs to change.

Understanding the Impact of Unredeemed Loyalty Points

Studies show that many loyalty members are inactive and a significant portion of their loyalty points remain unclaimed, representing a substantial loss of potential value for both businesses and their customers.

Dormant loyalty points are a double-edged sword, representing lost opportunities for both businesses and customers. Let's explore the negative consequences of unredeemed points:

For the Business:

• Hidden liability: Unredeemed points represent deferred revenue on the balance sheet, potentially overstating financial health and leading to inaccurate forecasting and decision-making.
• Misleading picture: These points create a misleading picture of actual liabilities, making the business appear financially stronger than it truly is.
• Lost opportunities: Unredeemed points tie up resources that could be invested in growing the business or enhancing customer experiences.
• Missed revenue: Businesses miss out on opportunities to drive sales and increase profitability by failing to convert these points into revenue-generating transactions.
• Program ineffectiveness: A program with a low redemption rate raises questions about its overall effectiveness. This can damage brand perception and make program improvements less of a priority within the company.
  

For Customers:

• Frustration and disappointment: When points are difficult to redeem or perceived as having low value, customers feel frustrated and disillusioned. This can damage trust in the brand and the loyalty program itself.
• Program abandonment: When points feel useless, customers feel their loyalty isn't valued. This can lead them to abandon the program entirely and seek out competitors with more rewarding incentives.
• Missed value proposition: Customers lose out on the potential benefits the program offers. This undermines the purpose of the loyalty program and leaves the customer feeling like their loyalty isn't truly rewarded.

Reasons Why Customers Don't Redeem Their Points: A Breakdown of Inactivity

Understanding why customers let their points accumulate unredeemed is crucial for crafting effective solutions.

Here are some key reasons that contribute to points’ dormancy:

1. Lack of Awareness and Transparency

• Confusion about program details: Customers might not fully understand the point system, reward options, or redemption process. This lack of clarity can lead to discouragement and hesitation to participate. 
• Limited communication: Customers may not be aware of their point balance, exciting new rewards, or special promotions. Are you effectively communicating program updates and benefits through various channels (email, app notifications, in-store signage)?

2. Unattractive Rewards and Low Perceived Value

• Mismatch between reward options and customer preferences: Do your rewards cater to diverse customer needs and interests? Offering generic rewards with limited appeal may not motivate customers to redeem their points.
• Points with low perceived value: Is the effort required to earn points worth the perceived value of the rewards?

3. Friction in the Redemption Process

• Complexity and time-consuming redemption process: Is redeeming points a hassle? A cumbersome redemption process with multiple steps or limitations can deter customers from utilizing their points.
• Lack of flexibility and convenience: Can customers redeem points easily through various channels (online, mobile app, in-store)? 

4. Program Design and Expiration Dates

• Limited redemption windows: Do strict expiration dates create a sense of urgency that leads to missed opportunities for redemption?
• Tiered program structures with complex rules: Are your program tiers and associated benefits easy to understand? Overly complex structures can demotivate customers from keeping track of their progress.

Solutions to Encourage Point Redemption

With an understanding of why customers don't redeem points, businesses can find ways to encourage them to use their loyalty points.

By using these strategies, businesses can make their loyalty programs more effective and get customers more involved.

1. Communication is Key; Foster Transparency and Awareness

• Make program details readily accessible: Ensure your program rules, point structure, and reward options are easily found on your website, app, and in-store materials.
• Embrace multi-channel communication: Regularly inform customers about their point balance, exciting new rewards, and special promotions through email, app notifications, social media, and in-store signage. Consider targeted communication based on customer preferences and purchase history.

2. Craft Compelling Rewards; Cater to Customer Desires

• Conduct customer research: Understand your target audience and prioritize rewards that resonate with their interests and aspirations. Offer a variety of reward options, from merchandise and gift cards to exclusive experiences and travel opportunities.
• Introduce a tiered system with clear benefits: Consider a tiered program structure that offers progressively more valuable rewards as customers reach higher point thresholds. Ensure the tiers and associated benefits are easily understood and provide a sense of achievable progress.

3. Streamline Redemption; Remove Friction from the Process

• Simplify the redemption process: Eliminate unnecessary steps and complexities in your redemption system. Offer a user-friendly online and mobile app platform for convenient point tracking and redemption.
• Embrace omnichannel redemption: Allow customers to redeem points in-store, online, or through your mobile app, providing flexibility and catering to diverse customer preferences.

4. Nurture Engagement; Gamify and Personalize the Experience

• Introduce gamification elements: Integrate point multipliers, bonus points for specific actions, or special offers to create a sense of excitement and encourage more frequent program engagement.
• Personalize the experience: Leverage customer data to offer targeted rewards and promotions based on purchase history and preferences. This not only makes rewards more relevant but demonstrates that the program truly values individual customers.

5. Rethink Expirations; Create a Sense of Urgency without Pressure

• Explore alternatives to strict expiration dates: Implement "dormancy notifications" that remind customers of their points before they become inactive. This provides a gentle nudge without creating a sense of urgency that leads to missed opportunities.
• Offer limited-time offers or bonus point periods: Create periodic promotions to encourage timely redemption and boost customer engagement without resorting to strict expiration dates.

Implementing Solutions and Measuring Success

With a comprehensive understanding of the strategies to encourage point redemption, business can now focus on implementation and measurement.

Let’s explore the steps for integrating redemption-focused initiatives into existing loyalty programs and tracking their effectiveness.

1. Steps for integrating redemption-focused initiatives

• Conduct a comprehensive review of existing loyalty program infrastructure and redemption processes.
• Identify areas for improvement and develop a roadmap for implementing redemption-focused initiatives.
• Collaborate cross-functionally with marketing, IT, and customer service teams to streamline processes and enhance program visibility.
• Communicate the benefits of redemption-focused initiatives to stakeholders and secure buy-in from key decision-makers.

2. Key Performance Indicators (KPIs) to track success

• Redemption Rate: Measure the percentage of accrued points that are redeemed by customers over a specific period.
• Customer Satisfaction: Solicit feedback from participants to gauge their satisfaction with the redemption experience and overall program.
• Revenue Impact: Analyze the impact of redemption initiatives on incremental sales, average transaction value, and customer lifetime value.
• Program Engagement: Track participation metrics, such as active members, frequency of redemption, and retention rates, to assess program effectiveness.

3. Continual Refinement and Optimization

• Regularly review redemption data and customer feedback to identify areas for refinement and optimization.
• Iterate on redemption initiatives based on performance insights and evolving customer preferences.
• Stay informed of industry trends and best practices to ensure the loyalty program remains competitive and aligned with strategic objectives.

Wrap up!

Dormant points represent a sleeping giant within your loyalty program. By understanding the reasons behind customer inactivity and implementing these actionable strategies, you can transform your program into a powerful tool that cultivates customer loyalty and drives business growth.

If you are looking for a way to refresh your loyalty program, Tada offers innovative solutions tailored to meet your business needs. With our expertise in loyalty program management and customer engagement, we can help you revitalize your program and unlock its full potential.

Contact Tada today for free demo to learn how we can assist you in transforming your loyalty program into a dynamic and thriving asset.