Auckland University research : loyalty programs designed to make sure customers don't get rewards

An article earlier this month in the New Zealand Herald claimed that "Shoppers may be missing out on millions of dollars of savings through unclaimed rewards every year". It referenced research from Auckland University' Senior Marketing Lecturer Rick Starr under the headline "Loyalty schemes rely on shoppers forgetting to cash in their points". Rick's view was that "people often forget to redeem their points. And companies count on customers doing so because full redemption would "cut their profits"".

True - in part. But. It depends what type of program you're talking about. In the programs we operate, the driving principle is to get all the points that have been issued turned into rewards by the customers who have earned them. This isn't some egalitarian approach but a very mercenary one.

[Full Disclosure - the article mentions ASB True Rewards and The Warehouse's Rewards MasterCard - both are programs we work for].

There are two key behaviour changes that occur when a customer joins your performing, well designed, rich, relevant loyalty program.

Behaviour change 1.

The first occurs when they begin to earn points and is particularly marked if you've made them pay a fee or annual subscription to join (always a good idea if possible). For example - credit card customers who join the loyalty program attached to the credit card will almost immediately spend more on that card by a multiple of 2 or 3 times what they were spending on the same card before they joined the associated loyalty program.

Behaviour change 2.

The second and far more significant behaviour change occurs when the customer makes their first redemption for a reward. At this point their spend on the card increases again by a factor of 3 to 8 times their pre-loyalty program spend. This second spend lift is determined by what it is they've redeemed for. Customers who redeem for cash back or against their annual fee don't generally increase their spend markedly after redemption. If they've redeemed for merchandise, gift cards or travel - then the second lift is particularly marked.

Customers who don't redeem don't experience this second lift.

The upshot - redemption is good (very good) and points that don't get redeemed (termed "breakage") are bad. How much breakage is there in New Zealand? Rob Mercer of Forsyth Barr Research reckons it's 10% of all points.

Far from cutting a company's profits - points that don't get redeemed are bad business and a missed opportunity to lift spend for the points issuer.