Given the cost and effort associated with customer acquisition, loyalty programs are an important customer-retention tool. However, linear reward programs in which customers simply accumulate points that can be used towards the purchase of goods and services may not always be the best choice – for both marketing and legal reasons.
The stockpiling problem
A linear points program has the advantage of simplicity. Buy a certain value of goods or services and get a certain number of points. Accumulate a certain number of points and redeem them for a certain value of goods. These concepts are simple to explain to consumers and the conversion factor into points and out of points is relatively easy to manage.
However, research has shown that consumers tend to “stockpile” points. The reasons why consumers stockpile points is not entirely clear. However, some research suggests that consumers have a notional “cash account” and “points account” in their mind. Spending cash or redeeming points involves the “loss” of something in exchange for gaining something else. The relative value of the cash over the points may depend on several motivating factors. One factor is that there may be an intrinsic value in the stockpile of the points. In other words, looking at my points balance provides me with satisfaction and allows me to dream about attaining a future goal, which has value on its own.
Does this matter? Yes. From the company’s perspective, the value of the points is a liability. The consumer can call on the points at any time and the company must be able to make good on the conversion into goods and services either out of its own inventory or by procuring those goods or services for the consumer. Points providers carry this liability on their books. Customers may stop purchasing goods and services but may hold onto their stockpile of points. So, the liability remains. Moreover, in some jurisdictions (although likely not in Canada) there have been concerns that these points could be considered unclaimed property, which could require organizations to make special efforts to locate the individual and ultimately remit the value of the property to the government.
To address the problem of the ever-increasing liability on their books and to overcome the intrinsic value of stockpiling and motivate consumers to use the points, some companies took to the practice of creating expiry dates for points. This triggered a consumer backlash – no doubt because these points had acquired a psychological value in and of themselves. Perhaps inevitably, the result was Canadian consumer protection legislation prohibiting the expiry of loyalty program points.
Ontario led the charge in 2017 to create a special consumer protection regime for consumers who participate in points programs. The provisions addressing loyalty point programs in the Consumer Protection Act, 2002 (Ontario) and the accompanying regulations prevent loyalty program providers form setting an expiry-date for reward points. Quebec is also in the process of amending the Regulation respecting the application of the Consumer Protection Act (Quebec) for the same purpose.
There are exceptions in both provinces to the no-expiry rule. For example, in both provinces points can expire if they can only be used to purchase goods and services of less than $50 in value. Similarly, points can expire if the account is dormant for a specified time-period. In Quebec, that time-period cannot be less than a year and the consumer must be given notice no less than 30 days and no more than 60 days before the points expire. There are also other exceptions and points program providers should seek legal advice on the most advantageous and legally compliant program structure.
Moving beyond linear points
These laws probably come a bit late in the development loyalty programs and, if anything, they will probably accelerate a shift away from simple linear points programs to benefits-based programs. Of course, there is still an important place for linear points programs and the law will not affect programs with low-value rewards. However, some research suggests that consumers want “benefits” or “status”. Yes, points are nice, but they want to get to the front of the line; they want experiences or service not available to others; they want value added services; and they want access to special promotions. These types of earned benefits do not fall within the points provisions of the consumer protection laws discussed above. Certainly, there are still consumer protections laws that apply (and marketers would do well to seek legal advice). However, these types of benefits programs are not subject to the points laws in Ontario and Quebec.
Interested? Read more!
- How Brands Can Build Better Loyalty Programs
- Members of Customer Loyalty Programs Generate Significantly More Revenue for Retailers Than Do Non-Members, Accenture Research Finds
- The Best Loyalty Programs Go Beyond Rewards
- Five ways to build a consumer-first loyalty program