Whether you are currently running a loyalty program or preparing to embark on one, at some point you will ask yourself, “How can I cut costs and still run an effective program?”

To answer that question, let’s explore the four levers we can pull to affect program costs.

Understand Your Vendor Costs

This is the most obvious way to reduce costs. When reviewing your vendor costs, ask yourself a few key questions:

  • How much am I paying for rewards? How much you pay for the rewards drives a significant portion of your rewards costs.

  • Does my vendor offer volume discounts? If so, what are the tiers? Understand what your current redemption volume is and consider how close you are to the next threshold. It may make sense to offer your customers a promotional points discount or lower your redemption levels to drive more redemptions to reach the next volume discount threshold. Not only will it help increase customer engagement with your program, but it will also drive down your cost per point too.

  • How has the volume of my redemptions changed since I started my program? Take stock of how much your program has grown over time. If your redemption volume has grown, ask your vendor for a volume discount. And don’t just look at your overall redemptions. Break it down by categories.

  • Do I have a high volume of a specific product or category? For example, do you have a really high volume of Store X’s gift cards? If so, negotiate a volume discount with Store X or push your vendor to do so on your behalf.

  • Are my vendor costs transparent? Do I understand how I’m charged? Don’t let it be a crapshoot. If you don’t know how you’re charged each month – eg. Monthly fees, transaction costs, etc – ask your vendor to explain it to you. Knowing how you are billed enables you to confidently forecast your monthly and annual costs based on your planned marketing activity.

A loyalty metrics cheat sheet that will make you a know-it-all

Promote the right rewards

  • What products are my customers redeeming for? While it may be tempting to select rewards with the highest margins, you should also make sure those are rewards that your customers want. If the least expensive rewards are not popular and that vendor also charges a high monthly fee, then any cost savings would be eroded.

  • In the categories my customers want, am I promoting the rewards that offer the best margins? Once you understand what rewards your customers are redeeming for, determine what the margins are for the products in that category. For example, if you know that your customers like to redeem points for store gift cards, determine which stores your customers are currently redeeming for and what other store cards you have access to. Then figure out what the margins are across the board. If you see that some stores offer you a better price than others, update your marketing efforts and rewards catalog to promote those stores before the more expensive ones. Typically, the best margins are offered by charitable donations, store gift cards and merchandise.

By doing this, you create higher levels of activity on items that have lower levels of cost. Just remember to balance promoting higher margin rewards with offering rewards that your customers actually want. Otherwise, you’ll end up with a rewards catalog featuring products that are low cost to you but completely irrelevant and uninteresting to your customers.

Explore subsidized rewards

  • Does my vendor offer free rewards or rewards that pay me? These are the type of rewards that come at no cost, or even more ideally, pay you. Your customers are valuable to other companies too. Often, customers who are part of your loyalty program share some of the same characteristics. This makes it attractive to advertisers because they have more control over who they are talking to and they will pay a fee to distribute promotional offers as rewards. The promotional offers range from low value gift cards to entice customers to visit the store, purchase discounts ($off/%off/BOGO deals), product samples (free deluxe sample-sized beauty, home or food products), free service trials (free months of subscription-based programs) and branded merchandise (branded promotional products like t-shirts, hats, water bottles).

Offer experiential or exclusive rewards

  • Does my company have access to events, experiences or items that are highly coveted but don’t cost me a whole lot? These rewards highlight a benefit or activity that only your company can offer. This type of reward is important because it provides a low reward cost while simultaneously driving a high-perceived value. For example, you could offer access to a high profile event that your company is sponsoring. While it is likely a minimal to low incremental cost to your company, the access is highly coveted and valued by your customer.

This becomes a unique opportunity to burn a large number of points while keeping your costs down. Through this type of reward, you can procure rewards that cannot be purchased or do not have a clear retail value. Some examples of this are limited edition products (limited production merchandise, sold out tickets and exclusive content), exclusive experiences (movie screenings, stadium tours, VIP passes) and bundled travel packages (bundled travel, hotel and activities).

Another effective way to reduce costs and leverage experiential rewards is through contests such as sweepstakes, instant wins, auctions, etc. The idea is to have members redeem points in exchange for an entry for the chance to win an item or experience that you can get at no or low cost. Contests give customers who don’t have a large bank of points an opportunity to redeem for something that drives excitement.

In the end, there are a variety of tactics you can use to reduce the cost of your loyalty program. The right approach can change depending on your program’s current situation and changes as your program grows. Remember to review your program on a regular basis and ask yourself these cost reduction questions again and again.

Have you had success reducing the cost of your loyalty program using these tactics? Which tactics worked the best for you? Are there other ideas that you’ve tried?

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