What’s The Point? The Science Behind Loyalty Points Programs

5 February 2025
Lance Walker, Former CEO of Loyalty NZ

Almost all loyalty programmes rely on some form of loyalty currency as the mechanic for recognising loyal behaviours which can then be redeemed for rewards. The loyalty point is the most common currency used today. First appearing in the loyalty programme boom of the 1980’s and 1990’s, points were a natural evolution of the stamps and coupons which were the currency of the day for much of the 20th century.

Using points as the loyalty currency has a number of advantages. Points are:

• Easy for the customer to understand
• Flexible both for issuance and redemption
• Adaptable to multiple retailer needs

There is proven psychology behind why a currency like loyalty points are effective:

• Human beings have always liked collecting things - be it stamps, butterflies, rocks, cards…or points. We get a dopamine hit from collecting and seeing our balance increase.
• The theory of medium-maximisation, which says that people will focus on the medium itself (ie the points) not just the outcome (ie the rewards), and that we get a sense of achievement in seeing the medium itself grow (even before those points are redeemed).
• The progress-effect which says that people like achieving goals, and the closer we get to a goal the more motivated we are to complete it (also called the goal-anticipation effect). Seeing points accumulate motivates us to keep collecting.
• The ego and status effect that comes from building up a points balance, especially when we can compare that to others (which lies at the heart of gamification, loyalty leader boards and status tiers).

The more that a retailer can introduce points into their total relationship with the customer across different touch-points, the stronger these phycological effects and the greater the opportunity for loyalty programme engagement.

Leveraging the points currency

The basis of most loyalty programmes is issuing points for reaching a spend threshold, for example 1 point for every $20. However, the beauty of points as a currency is that they can be used to incentivise and reward all kinds of behaviours. The very best loyalty programmes recognise this. They use points as both a promotional and relationship mechanic.

Common examples include:

• Issuing points to recognise certain special events (eg birthdays, anniversaries)
• As a thank-you to the customer for taking action (eg providing information/completing a profile, or completing a survey)
• To incentivise added-value transactions (eg awarding points for purchasing an extended warranty, or signing up for a long-term subscription)
• As a service compensation device (eg offering points where there has been a poor service experience).

One of the most effective ways to use points is for points-based promotions.

These provide a great alternative to discounting, usually at much lower cost or margin offset. Some of the most common forms include:

• Multi-point promotions, eg double or triple points. These can be particularly useful to encourage shopping on low traffic days or times of day (eg Double Points on a Monday). The value equation for the customer is appealing as it accelerates their points earning potential.
• Product-based promotions, eg bonus points for buying a specific product or service rather than for spend (eg 5 bonus points on any purchase of ABC branded clothing). These can be particularly useful for moving products or distressed inventory as an alternative to straight discounting (with less margin loss).

Points promotions can also be segmented to target particular groups of customers. For example:

• Winning back past customers
• Rewarding and recognising high value customers
• Encouraging a customer to trial a new product a service
• Stretching your “next-best” customers to spend more.

The benefit of using points in these different ways is that it engages the customer more actively with the currency, and therefore with the loyalty programme. If they are only earning points for reaching a certain spend threshold then they may not accumulate points at a level (or rate) which motivates them, or they may end up passively collecting points rather than actively doing so. The higher the active the collection, the higher the engagement; the higher the engagement, the more likely the customer is to want to collect more points (a loyalty virtuous circle!).

Almost any retail behaviour you want to promote can be facilitated and incentivised by the use of your loyalty programme currency. In doing so, you are maximising the loyalty programmes impact across your business.

Don't forget redemption

It’s also worth considering the redemption side of the points equation. While most loyalty programmes today focus on points earned equating to a certain level of discount(eg earn 100 points and get 10% of or earn a $5 voucher), points can also be converted into other rewards. For example:

• Product and gift based rewards. This can be a set range of rewards or it may be special limited edition offers. This is another way to exit distressed inventory.
• Prize draws with points as the entry mechanic (eg every 10 points = 1 entry). This is effectively another redemption mechanic for points, giving customers a different way to use their points (ie for chances to win prizes rather than discounts or other rewards). Certain customers are more motivated by chances to win and the more points they have, the more chances they have to do so.
• Allowing points to be redeemed for experiences, for example special member only events.
• Accessing added value services, such as using points to get free extended warranties or free shipping.

Final words

The common theme across all of these examples, on both the issuance and redemption side, is that the loyalty currency - the loyalty point - is being utilised to drive a range of behaviours, strengthen the relationship with the customer and drive higher engagement with your loyalty programme. The higher the levels of engagement, the more the customer will value the programme and the higher the loyalty benefits for the retailer.

And at the end of the day…that is the point!

About the author

Lance Walker has spent 30 years working in loyalty programs and marketing. He is the former CEO of Loyalty New Zealand, which operated the Fly Buys loyalty program, and has served as Managing Director of two leading direct marketing agencies. Lance also founded and ran a specialist customer relationship marketing consultancy.

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