Marketers Overlook “Buried Treasure” In Unredeemed Loyalty Points

Marketers issued $48 billion in loyalty currency, such as points and miles, during 2010. If patterns hold, customers will redeem only $32 billion of them.

Don’t count that $16 billion in breakage–unredeemed currency–as a win for marketers, however. Laying right alongside it in the till are missed opportunities to strengthen relationships with customers, as well as generate additional sales from them, as loyalty currency is rarely redeemed without additional purchases.

There are several reasons why customers don’t redeem their loyalty currency, according to Kelly Hlavinka, managing partner at Colloquy. Some don’t acquire enough to reach a reward threshold. Some find their points expire after a certain amount of time. But others are thwarted in their efforts to cash in, either because the processes for doing so are obscure, or because the inventory–such as seats on desired airline flights–isn’t available.

“Sometimes that’s by design,” Hlavinka says. “Sometimes breakage is in play for companies to help manage their overall liability associated with the rewards.”

According to “Buried Treasure, The 2011 Forecast of U.S. Consumer Loyalty Program Points Value,” marketers who use loyalty programs are primed to gain a better understanding of the value of amassed loyalty currency. The report was jointly issued by Colloquy and loyalty marketing technology firm Swift Exchange.

Colloquy and Swift Exchange note that three segments—travel and hospitality, financial services and retail—collectively account for more than 95% of loyalty currency generated. Within that, travel and hospitality issue $17 billion, financial services (which includes credit card rewards) give out nearly $18 billion, and retail operations extend just over $12 billion.

But not all currency is earned alike. Of the $17 billion issued by travel and hospitality companies, $7.3 billion—roughly 43%—was sold and distributed by third parties. That compares with $1.6 billion (9%) within the financial services industry and $850 million (1%) of that given out by retailers.

Marketers may love the revenue they gain from selling their points and miles, but a sub-segment still hasn’t bought into the idea that currency redemption—even though it represents an outlay in the form of rewards—provides business benefits.

“On the engagement side, redemption has been proven to drive profits,” says Nancy Gordon, COO of Swift Exchange. But when companies focus on managing expenses—and loyalty points are usually carried as a liability on balance sheets—there can be pressure to devalue, or even break, the value of the currency.

“If there are better mechanisms to managing costs than fear of redemption, if redemption is good all the time and not just up to a certain point, this fear may be alleviated,” Gordon adds.

A well-considered loyalty program is structured so that rewards don’t represent a disproportionate liability to the merchant. Hlavinka suspects that the companies which haven’t bought into the premise that redemption is good have probably started their rewards program because competitors have done so. Currency redemption, she points out, should drive desired behavior—which, in turn, should be the motivating factor for starting such a program.

“For the group of companies that may not have fully accepted that redemption is good, we need to do more education of the correlation between the moment of truth when a customer redeems and the incremental behavior which is seen,” Hlavinka says. “They spend more, have greater retention and more positive word of mouth advocacy.”