Cannabis Loyalty Program: How to Create the Best Point Structure

A point structure determines how many points a customer can earn per purchase. There are two common models:

  • Fixed points: Fixed number of points per dollar spent. For example, Starbucks rewards 2 points and Hilton rewards 100 points for each dollar spent.
  • Varied points: In addition to the fixed points that all purchases receive, some preferential products/brands receive extra points. If used wisely, the preferential points can be an effective tool for promoting products/brands and for avoiding discounting clearance items. For example, if a dispensary wants to attract more customers to its own brand, it can reward an extra three points per dollar spent on the store brand. For another example, instead of marking down a clearance item, incentivize people to purchase with double or triple point earns.

Preferential point structures can also open doors for win-win collaboration between the dispensary and manufacturers/distributors who want to promote in the store.

Remember that points can also be rewarded for activities other than purchases. For example, if you want to incentivize social sharing, you can reward points for referring friends, posting online reviews, and sharing on social media.  

Which point structure should my dispensary use?

We recommend starting out with a fixed point structure, because it is simpler to manage. As your loyalty program matures, you can gradually add in varied points to supercharge your purchase incentives. 

Should I reward 1 or 100 points per dollar?

Imagine Dispensary A gives 1 point per dollar spent, and a pre-roll reward requires 250 points. Across the street, Dispensary B gives 100 points per dollar, and rewards the same pre-roll for 25,000 points. Which dispensary would a customer find more attractive?

You may answer they are equally attractive, since the exchange rates for the pre-roll are exactly the same for both stores (spend $250 get one pre-roll). However, empirical research shows that’s not the case! Because customers are irrational.

Research has demonstrated that customers perceive the 100-point program to be more valuable than the 1-point program, and are therefore more willing to collect points in the 100-point program. However, when it comes time to redeem rewards, customers perceive the 25,000-point pre-roll to be more expensive than the 250-point pre-roll, and are therefore less willing to redeem the 25,000-point reward. [sad PhD’s dissertation]

So if you are a dispensary who wants customers to collect more points and redeem less, go with a higher point magnitude. One word of caution, discouraging point redemption may not actually be desirable (as we discuss below), so a medium point magnitude (not too low and now too high) would probably be the most effective at balancing the collection and redemption effects.

Is point breakage good?

Point breakage is the technical term for points that expire and are never redeemed by members. At first glance, point breakage appears to be a good thing – fewer redemptions, lower cost, right? It is actually more complicated.

A survey of 2,250 loyalty program participants shows that customers who successfully redeem rewards are likely to display greater engagement, and work harder to earn the next reward. The survey found that a positive redemption experience would drive members to continue to spend with a brand. It also found that redemptions helped to re-engage previously inactive members.

Breakage may in the short term reduce cost, but the long-term profitability of a loyalty program is better served by encouraging members to be active, engaged, and get into the redemption cycle.

Should points ever expire?

The point expiration policy greatly impacts a program’s point breakage rate. Imposing a point expiration date creates a sense of urgency, which results in a higher redemption rate. This effect has been demonstrated by Air Miles, which introduced a point expiration date to its loyalty program in 2017 and saw breakage drop from 26% to 24.5%.

There are two types of expiration policies:

  • Time-stamped points: Points expire after X time period. This method is the most straight-forward and easy to manage. We recommend starting with it.
  • Activity-based expiration: Points expire after X time period of inactivity. An activity can be a purchase or a redemption. This method is the best practice in the airlines and hotel industries and may be worth experimenting with in a dispensary context after the initial loyalty program matures.

For dispensaries, we recommend starting off with the basic time-stamped model, since it is the simplest to manage. 

How long should points be good for

The more frequent the transactions, the shorter the point expiration can be. However, be mindful not to expire points too fast or it can negatively impact the program’s perceived value.

Here are the point expiration periods from different industries:

  • Starbucks: 6 months
  • Noodles & Company: 1 year
  • Many airlines have adopted an 18–36 month activity requirement; whilst hotel programs tend to have a 12-month activity requirement.

For a cannabis dispensary, since the transaction frequency is high, an expiration between 6 and 12 month can be suitable.

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By Nora Chen