Guide 48 · Earn and redemption
How to set loyalty earn rates
Start from the share of spending you can afford to give back, then divide it by the value of a point to get points per dollar. Keep one simple, whole-number rate for most purchases, lower it or exclude categories with thin margins, and raise it only where a test shows the extra points bring extra profit. Check the cost at your expected redemption rate before you publish anything.
The earn rate is the number members remember: points per dollar, and it is the starting point of how loyalty points are calculated. It looks like a marketing choice, but it fixes a large part of what the program costs. Every point issued is a future reward, so the earn rate is effectively the price of a deferred discount. This guide shows how to work out a rate your margins can carry, how to adjust it by category and how to test it before members see it.
How points add up
How are loyalty points calculated?
Most programs use the same arithmetic. Points earned equal eligible spend times the earn rate, times any tier multiplier, plus any bonus points from a promotion. In a hypothetical program, a member with $80 of eligible spend at 1 point per dollar and a 1.5 times tier multiplier earns 120 points. Eligible spend is the part your terms say counts, usually the amount after discounts and before tax and delivery.
On its own, the earn rate decides very little. The earn rate says how many points a dollar earns; the value of a point says what each one buys. Multiply the two and you get the member’s return: the share of spending that comes back as rewards. Sephora Beauty Insider members earn 1 point per dollar on Sephora merchandise, and any member can redeem 500 points for $10 off, a value of 2 cents per point. That is a return of about 2% on that redemption option. Members compare that number with what else they could earn: according to the CFPB, rewards on major issuers’ general purpose credit cards averaged 1.6 cents per dollar spent in 2022.
The return is what drives cost and behavior. Ten points per dollar at a tenth of a cent each gives exactly the same return as one point per dollar at one cent; only the numbers members see are different. So decide the return first, then choose the earn rate and point value that express it most clearly.
The earn rate on purchases, the base earn, is only part of what members collect. Many programs also award points for actions such as joining, completing a profile, writing a review or referring a friend. Those points cost the same to redeem as points earned on purchases, so include them when you calculate the total return. If a large share of points comes from actions rather than spending, the real cost per dollar of sales is higher than the headline rate suggests.
What you can return
How do you work out what you can give back?
Start from margin, not from competitors. Work through these steps:
- Take your average gross margin after the direct cost of goods and fulfillment.
- Decide how much of that margin the program can return without missing your profit target. Include the cost of running the program, not just the rewards.
- Adjust for redemption. Not every point will be used, but plan as if most will, and treat breakage as a cautious adjustment rather than a source of funding.
- Divide the target return by the value of a point to get points per dollar.
A hypothetical example: a retailer with $2 million of monthly sales and a 20% gross margin earns $400,000 a month in gross profit. At 1 point per dollar, a 1-cent point and an assumed 80% redemption rate, the rewards cost about $16,000 a month, or 4% of gross profit. At 2 points per dollar, the cost doubles to $32,000, or 8% of gross profit, with no change in sales unless the richer offer changes behavior. Seeing the cost as a share of gross profit makes the choice concrete.
One rate or many
Should one rate apply to everything?
One rate is easiest to explain, and it works when margins are similar across what you sell. When they are not, a single rate gives away too much on thin-margin items and too little where you could afford more.
| Category margin | Typical approach | Why |
|---|---|---|
| Healthy, close to your average | Base rate | The default the program is built on |
| Thin | Reduced rate, or no points | Points could cost more than the sale earns |
| Very high, or a product you want to grow | Bonus points as a promotion | Rewards the behavior you want, and can be withdrawn |
| Gift cards, taxes, delivery fees, returns | Usually excluded | No margin, or points would be earned twice |
Keep the number of exceptions small and state them in the terms. Members accept a short exclusion list; they lose trust in a program where every receipt needs checking.
Keep it simple
How do you pick a number members understand?
Choose a whole number that members can calculate in their heads. One point per dollar is the simplest choice because it needs no arithmetic. A larger number, such as 5 or 10 points per dollar, makes balances grow faster and feel bigger, but members then need to know what a point is worth before the number means anything. Avoid awkward rates such as 7 points per dollar at a value that makes every reward a fraction.
Be clear about what earns. Starbucks, for example, moved in 2026 to a program where members earn Stars based on spend rather than on how they pay. A simple, stated basis for earning matters as much as the number. Apply the rate to the net amount after discounts, excluding tax and delivery, and say so.
Tiers and promotions
When should rates differ by tier or promotion?
Tier multipliers give higher tiers more points per dollar. They are a clear reward for your best customers, but they raise the cost of the members who already spend most, so model them on the real spending of each tier, not the average member. Promotions, such as double points on a slow day or bonus points on a new product, are the right tool for short-term goals, because they can end without changing the base deal.
Raise the base rate only with evidence. Run a controlled test in which one group of members gets the higher rate and a comparable group does not, and check whether the extra points bring extra profit within a few months. The incrementality guide explains how to set up the comparison.
Test it
How do you test the rate before launch?
- Run test transactions for several basket sizes and check that the points awarded match the intended return.
- Check exclusions: tax, delivery, gift cards and returns should behave as the terms say.
- Model a full year in which members redeem at your expected rate, and confirm the cost fits the budget.
- Write the rate, the exclusions and when points appear in the account into a short member notice.
- Review the rate monthly for the first quarter against real margin and redemption data, then lock it in.
More answers
Frequently asked questions
How are loyalty points calculated?
Eligible spend times the points per dollar, times any tier multiplier, plus bonus points from promotions. Eligible spend is usually the amount after discounts, excluding tax, delivery and gift cards. The member's return is the points earned times the value of a point, divided by spend.
What is a good earn rate for a loyalty program?
One your margins can carry and members can understand. The right number comes from the share of spend you can return and the value of a point, not from copying another program, whose points may be worth more or less than yours.
Which purchases should not earn points?
Commonly excluded are taxes, delivery fees, gift card purchases, returns and items with very low margins. Points on gift cards in particular can be earned twice, once on the card and again when it is spent.
How does the earn rate relate to point value?
Together they set the member's return. Earn rate times point value equals the share of spend members get back. Ten points per dollar at a tenth of a cent each gives the same 1% as one point per dollar at one cent.
Should higher tiers earn faster?
Many tiered programs give higher tiers a multiplier on the base rate. It is a strong reward for your best customers, but it raises the cost of the members who already spend most, so model it on actual tier spend.
How often should earn rates change?
Rarely. Promotions can vary week to week, but the base rate is part of the deal with members. Review it after the first few months of real data, then change it only with notice and a clear reason.
Sources
- F-SEP-01Beauty Insider Frequently Asked Questions (sephora.com)
- F-SEP-05Beauty Insider Frequently Asked Questions (sephora.com)
- F-SBX-03Starbucks reimagines its Rewards program with new levels and exclusive perks (about.starbucks.com)
- F-G4-06Credit Card Rewards, Issue Spotlight, May 2024 (consumerfinance.gov)