Managing a loyalty program’s financial drivers is crucial to its success, regardless of size. Loyalty currency issued carries a monetary value that can increase a company’s liability and deferred revenue accounts. Cost per point (CPP) is the primary metric used to calculate these financial implications.
In its simplest form, a program’s cost per point (CPP) can be calculated by dividing the cost of rewards redeemed by the amount of loyalty currency spent, for a given period.
Determining the real cost of a redeemed reward is subject to debate and will often differ based on if it is being used to calculate a program’s financial implications versus overall health.
With an estimated $16 billion worth of unredeemed loyalty currency in the US alone, managing a loyalty program’s cost per point has become a full-time job for many practitioners.
We have outlined 5 ways to manage your cost per point in this deep dive. Here we will explore the simplest way for loyalty programs to reduce their cost per point: Decrease value per point
Decrease value per point
The easiest way to decrease a reward’s CPP is to increase the amount of currency required to redeem it.
Value per point (VPP) is the primary metric used to calculate the amount of currency required to order a reward. The VPP for a reward is calculated by dividing the value of a reward ordered by the loyalty currency spent to order it. For example, a $5 gift card that costs 500 points has a VPP of $0.01.
Decreasing a member’s value per point increases the amount of currency a member needs to order it, thereby decreasing the reward’s cost per point.
Related: A loyalty metrics cheat sheet that will make you a know-it-all
While this is the easiest and most common way to manage your CPP, the member and media backlash can be sizable. Many airlines have been under media scrutiny for adjusting their VPP over the past couple of years.
One approach to decreasing the a program’s VPP is to create a pricing scale based on the total value of the reward. In this scenario, members have lower purchasing power when ordering rewards with low price thresholds. The easiest way to implement this is to apply a fixed amount of points to every order. The result will be a reduced cost per point for member redeeming low-value rewards while encouraging members to save their points for higher value rewards.
Member value corrections can be necessary for legacy programs. That said, other approaches can yield similar results without disenfranchising existing members.
There is a variety of tactics available to a loyalty program trying to improve their cost per point management. The right approach will depend on your current program construct and installed member base. A successful implementation will improve your financial viability, positioning your company for long-term growth.
Decreasing Value Per Point is only one tactic that can be used to manage your cost per point. We have outlined 5 ways to lower cost per point in our deep dive that can be downloaded here.