What Premium do Credit Card Loyalty Programs Charge Merchandise vs Cash Back?

How much of a premium do credit card loyalty programs charge for the redemption of merchandise vs. a cash back reward that has the equivalent market value? 

As our clients know we collect vast amounts of data from loyalty programs in four key market verticals (Financial Services including co-brand, Hotel, Airline and retail).  

We analyze the data literally hundreds of different ways in order to assess and analyze loyalty programs in a simplistic manner. Well, here is a simplistic analysis on how top credit card rewards programs (lets say these are the top five financial institutions withr regards to active credit cards issued) price their merchandise in comparison to an equivalent cash back reward. First the results:

The Rankings below show the Price Premium that Credit Card Rewards Programs Charge in Points for a 8GB iPod vs. an Equivalent Cash Back Reward (cash back with market value of $195)

1. Bank 1 – 50.26%   higher for 8GP iPod than equivalent $195 cash back reward

2. Bank 2 – 29.23% higher

3. Bank 3 – 12.43% higher

4. Bank 4 – 6.04% higher

5. Bank 5 – 1.54% higher

What This Means

What the results essentially tell us is that these credit card providers are all charging more (in points) for merchandise (based on market value of merchandise) then they charge for cash back. As an example, if at one credit card reward program it takes 20,000 points to redeem $200 in cash back rewards, at the same credit card reward program it might take 30,000 points to redeem a 8GB iPod (market price of roughly $200).

Why Do Credit Card Rewards Programs do this?

Since no rational person would redeem a 8GB iPod for a premium of 50% over an equivalent cash back reward (you could just redeem for cash back and go buy a iPod), why do credit card reward programs price merchandise in this manner? Its a good question and one that every loyalty program manager should assess and ask themselves.

First: Its highly likely that the program is using the “profit” on merchandise items such as iPod’s to “justify” their loyalty program. Since its relatively easy to show the profiit of these items on a spreadsheet (price redeemed vs. invoice price from supplier), loyalty program managers are tempted to price items in this manner to justify their programs.

Second: Some people do redeem premium priced merchandise. Thus, if people are redeeming for the premium price rewards and these merchandise items “give a profit,” why not price in this manner.

Our View

Our viewpoint is that its better to price merchandise items on an equivalent basis to cash back (1:1) for a number of reasons.

First: As we stated earlier, any rational person redeeming rewards would just redeem cash back rewards (for a lower point price) and then use their cash back reward to redeem an iPod.

Second: A consumer in a credit card rewards program may consider the program to be “unfair” if they see merchandise items (iPods, etc.) overpriced in comparison to cash back rewards.

Third: Our research shows us that merchandise rewards that are priced appropriately (1:1 vs cash back) will yield significantly greater demand (redemptions). This should allow the loyalty program over time to realize “profit” on merchandise redemptions due to the potential lower cost (invoice cost to the supplier).

Fourth: given that competitors are pricing merchandise and iPods more competitively (as seen by the examples above), can you afford to charge premiums on iPods and other merchandise items?   

Summary

In summary, while some credit card rewards programs continue to “charge a premium” for merchandise vs. cash back, we feel it is not a good long term strategy. It can alienate your best customers by telling them that they are in fact “dumb” if they actually redeem the reward; and furthermore its just not competitive with the best credit card loyalty programs.

Disclosure: Credit Card Reward Programs are among our clients and thus we do not reveal the names of those clients and the subsequent loyalty program analysis in all public research. In this case we have not included the names of the actual credit card rewards programs for this reason. If you wish to find out more information please contact us directly @ mail@agencionline.com

Thank you!

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