Loyalty glossary · 1. Program mechanics and currency (40)
Redemption Cost
Redemption cost is the financial expense a loyalty programme recognises when a member converts points into a reward, usually expressed as a cost per point or as a percentage of the points' face value. It is the moment accrual turns into a real cash outflow and the central number that determines whether a programme is priced sustainably.
Redemption cost is where a loyalty programme's promise meets its cash register. Accrual can be priced at any number the marketing team chooses, because the cost is deferred. Redemption is the point at which the programme must actually buy the reward, and the cost per point on that day is the only number that matters for the unit economics.
Operators like to quote the earn rate as the programme's cost, but that is not the same thing. The earn rate is set to drive behaviour. The redemption cost is what the reward actually costs the programme to source. A point issued at 1 cent on the liability ledger can still cost 1.3 cents to redeem if the reward supplier raises prices or the catalogue is full of high cost options.
The trap is treating redemption cost as a fixed constant. It is not. It moves with reward mix, with partner contracts, and with the operator's own redemptions policy. A programme that defaults members into high cost redemptions is not earning more loyalty, it is buying engagement with future losses that accrue quietly against the deferred revenue.
Work the arithmetic, because the argument only lands with numbers on it. A programme issues points at 1 cent per point on the ledger. A member redeems 100,000 points for a hotel night the programme sources at 0.9 cents per point, so the cash cost is 900 dollars. Move the sourcing cost to 1.1 cents per point and the same redemption costs 1,100 dollars, a 200 dollar swing from the same member and the same points.
Breakage complicates this. A high redemption cost discourages redemptions quietly, which feeds breakage and makes the deferred liability look stable while the programme slowly loses its reason to exist. Breakage is not a saving when it is caused by redemption cost set above what a rational member will pay.
Co-brand cards do not solve the problem, they move it onto someone else's P&L and then bring it back. The issuer buys points at a negotiated rate, often below true redemption cost, and the programme trusts future interchange to cover the gap. That trust is exactly the kind of assumption that gets a loyalty programme into trouble. A co-brand card that does not price points above redemption cost is an accrual scheme with a redemption problem attached.