Imagine you’re running an online shop for an outdoor retailer. Two years ago, you launched a loyalty programme: one point per euro, and 500 points give a 5-euro discount on the next purchase. Simple, appealing, quick to set up. For Black Friday, you added ‘10 times the points’; for the anniversary, ‘double points on everything’. The customers were delighted.
Then you’re sitting in the quarterly review meeting, and the finance director asks a single question: “How much do we actually owe our customers?”
No one in the room knows the figure. The points system is a plugin, the account balance is a column in the customer table, and no one has ever reversed the book entry for returns. The obvious solution is quickly put on the table: we’ll simply make the rewards more expensive. This is precisely where many programmes fall apart.
This article shows you how to structure your customer loyalty programme so that you can answer the finance director’s question in five minutes. And if you’re currently planning your Black Week promotions: read the section on points promotions before you write ‘10x’ in your banner.
You print money, whether you like it or not
Every point your shop awards is a promise to pay. It has a value in goods or a discount; it’s held in your customers’ accounts, and at some point it will be redeemed. You’re no longer just handing out sweets. You’re running a mini central bank.
The aviation industry illustrates just how serious this can become. In June 2020, in the midst of the pandemic, United Airlines secured a loan commitment of 5 billion US, using its MileagePlus frequent-flyer programme as collateral; by July, this had risen to 6.8 billion. United itself estimated the value of the programme at around 22 billion US dollars. This figure was driven primarily by the sale of miles to partners such as credit card providers. Miles are a tradable product in this context.
Your shop isn’t United, but the principle applies in exactly the same way on a smaller scale. If you prepare your accounts in accordance with IFRS, under IFRS 15 you must recognise a portion of the revenue as a contract liability, provided that the points constitute a “substantial right” for the customer. Under the German Commercial Code (HGB), the question arises as to whether a provision is required; you should clarify this with your tax adviser.
“Every point is a promise with a price tag. Know the price tag before you make the promise.”
The three levers of your loyalty points
A points scheme has three levers, and many shops only pay attention to one of them. The earn rate determines how many points are awarded per euro spent. The point value indicates what a point is worth when redeemed. And the redemption rate describes what proportion of the points is actually redeemed.
Multiply these together to get your actual cost per euro of turnover. One point per euro multiplied by one cent per point equates to a nominal discount of one per cent. If 80 per cent of the points are redeemed, the programme effectively costs you 0.8 per cent of turnover. Sounds harmless. Until the promotions come along.
| Scenario | Earn rate | Point value | Redemption rate | Effective cost per €100 turnover |
|---|---|---|---|---|
| Basic programme | 1 point per € | 1 cent | 80 per cent | €0.80 |
| With ‘Double Points’ promotion | 2 points per € | 1 cent | 80 per cent | €1.60 |
| Black Friday ‘10x points’ | 10 points per € | 1 cent | 80 per cent | €8.00 |
Model calculation, not industry figures. The redemption rate of 80 per cent is an assumption.
The third line is your Black Friday from the opening scene. The weekend effectively represented a discount of eight per cent (nominally ten) on every shopping basket that went through the till on those days. There was no mention of this in the promotional budget because the costs only appear months later as redemptions. Economists call this sort of thing money supply expansion, and it often leads to the same suggestion: devaluing the currency.
That is why every loyalty points promotion, with its full costs, belongs in the promotional budget, in the month it is awarded. If the figure there looks too high, it is actually too high.
Points aren’t the best way to build customer loyalty for every product range. If you sell consumables on a regular basis, a subscription model often creates a more direct connection, whilst for highly price-sensitive categories, immediate cashback is more effective. Points really come into their own where customers make irregular but repeat purchases.
Breakage: the tempting profit that undermines your loyalty programme
In the loyalty industry, there is a term for points that are never redeemed: breakage. For the accounts, this ultimately translates into revenue for which no service has been provided. The volume is considerable. A much-cited estimate by Colloquy and Swift Exchange in 2011 suggested that US consumers accumulate points and miles worth 48 billion US dollars annually, and around a third of these – approximately 16 billion US dollars, go unredeemed.
The temptation is obvious: high thresholds, short expiry periods, complicated rewards. The programme becomes cheap and dies, because a point that nobody redeems doesn’t retain anyone’s loyalty. At best, it reminds the customer that ‘something has expired again’ with you.
The largest programme in Germany demonstrates the opposite approach. Payback reports around 35 million active users in Germany for 2025 and a redemption rate of 95 per cent. Almost every point is redeemed, and that’s another reason why people keep collecting them: a Payback point is worth one cent, and everyone knows that.
Nevertheless, there are expiry dates, and they are legitimate. With Payback, points are valid for 36 months and then expire en masse on 30 September. The crucial point is that such a rule is stated transparently in the terms and conditions from the outset and is not calculated as a hidden source of revenue.
“Plan your loyalty programme with redemptions in mind. Breakage is a side effect, not a business model.”
In practical terms, this means: factor in a high redemption rate. If the actual rate is significantly lower, this is a warning sign that your programme is not being understood or appreciated.
Inflation and devaluation: What Starbucks learnt in 2023
At some point in many programmes, the moment from our opening scene arrives. Points are being awarded too generously, redemptions are eating into margins, and someone suggests making the rewards more expensive.
Starbucks implemented this in February 2023 with Starbucks Rewards in the US. Rewards that previously cost 50 stars now cost 100 stars. 150 became 200, and 200 became 300. Depending on the reward, a star thus lost between a quarter and half of its value. Criticism was not long in coming, and the devaluation hit customers with large balances particularly hard.
In Germany, there is an additional legal restriction. In 2010 (Case No. Xa ZR 37/09) that, upon terminating its programme, an airline was not permitted to reduce the validity of bonus points already accumulated from five years to around six months via its terms and conditions. The points constituted a discount promised at the time of purchase. The clause placed customers at an unreasonable disadvantage and was invalid.
If you must devalue them anyway, do so as follows:
- Give plenty of notice: several months’ advance warning and a clear explanation.
- Protect existing points: Points already accumulated retain their original value or are granted a generous redemption window.
- Offer compensation: new rewards, better tier benefits, anything that makes up for the loss for loyal customers.
It’s better not to let it get that far in the first place. A fixed, publicly communicated points value acts as a commitment. It forces you to set the earn rate realistically from the outset.
Why the first reward must come early
Now for the fun bit: motivation. Research highlights two effects that you can directly incorporate into the design of your loyalty programme.
The first is called the goal gradient effect. In 2006, Ran Kivetz, Oleg Urminsky and Yuhuang Zheng demonstrated in the Journal of Marketing Research that participants in a real-world café scheme (“Buy ten coffees, get one free”) the closer they got to the reward, the more frequently they made purchases.
The second is the endowed progress effect. Joseph Nunes and Xavier Drèze gave stamp cards to customers at a car wash. One group needed eight stamps, the other ten, with two already stamped. The distance to be covered was exactly the same. Nevertheless, 34 per cent of the group with the head start redeemed their cards, compared with 19 per cent in the control group.
For our outdoor shop, this means in practical terms:
- Award welcome points: they visibly fill up the progress bar. 100 points upon registration, with a 500-point threshold, already represent 20 per cent of the way. Present them as a starting balance.
- Offer the first reward early on: after two to three typical orders. A customer who never experiences the first reward will never understand the programme.
- Show progress everywhere: in the customer account, in the shopping basket (“120 points to go until your 5 euro discount”), in the order confirmation.
The shopping basket prompt, in particular, has a double effect. It links the programme to the moment of the purchase decision and can increase the order value. We have shown how purchase frequency, order value and customer value can interact, we have calculated in More Turnover Without More Traffic.
A points account is a general ledger
This is where it is decided whether the finance director receives her reply in five minutes or never. A common design flaw is a single ‘points balance’ field in the customer record, which is incremented with every order.
The ‘bank statement’ principle is the neatest approach: every transaction is a separate entry with a date, reason and reference: credit from order 4711, redemption in order 4820, cancellation due to a return, expiry on the cut-off date. The account balance is then simply the sum of all entries. This way, you can see at any time how many points are outstanding, when they expire, and which campaign has generated how much liability.
This is particularly important in the German online retail sector due to returns. The Returns Management Research Group at the University of Bamberg estimates that in 2021 in this country almost one in four parcels was returned, amounting to around 530 million return shipments.
Applied to an outdoor shop: a customer orders a jacket in three sizes for a total of 600 euros, sends two back and still retains 600 points if the system only credits points at the time of ordering. A ‘reserved’ status would make sense, which only changes to ‘available’ once the cooling-off period has expired.
For Shopware, there are several extensions available in the Store for bonus and points schemes, making it quick and easy to get started. The limitations become apparent as soon as points are to apply across channels. The customer wants to redeem her points at the shop till, but the till system doesn’t recognise them. In that case, you’ll need a dedicated points ledger as a service that connects the shop, app and till via API and, via an ERP integration to the accounts department as well.
When your currency becomes too real
The more your loyalty points function like money, the more questions the tax authorities and the law on terms and conditions will raise. There are two things you should be aware of before drafting your terms and conditions. They are not a substitute for tax or legal advice.
On 5 March 2026, the European Court of Justice ruled in the case C-436/24 (Lyko) that loyalty points which only entitle the holder to a reward upon a further purchase are not vouchers within the meaning of the VAT Directive: the trader is not obliged to accept them as consideration.
The Court did not rule on whether this also applies where points are converted into a one-euro voucher, transferred or paid out. A one-euro voucher may itself constitute a voucher within the meaning of Section 3(13) to (15) of the German Value Added Tax Act (UStG). This is precisely what you should have checked in the case of a fixed point value.
As regards the terms and conditions, the lesson from the Federal Court of Justice (BGH) ruling above applies: expiry periods, minimum thresholds and reservations regarding amendments must be clearly included in the terms of participation from day one, and subsequent tightening of the rules at the expense of accumulated points is risky.
Back to the quarterly meeting
Let’s rewind the opening scene once more, this time with a programme designed to function as a currency.
The finance director asks how much you owe your customers. You open the points ledger and read out, for example: 2.1 million outstanding points, i.e. a liability of 21,000 euros at face value, of which 400,000 points are still reserved until the end of the withdrawal period. The date on which the first points expire is noted alongside. The latest double-points promotion is included in the March promotional budget at full cost, calculated on the basis of an 80 per cent redemption rate. There’s no need for anyone to talk about a devaluation.
“You can tell a good loyalty programme by the fact that the finance director likes it just as much as the customers.”
Are you currently planning your loyalty programme or do you want to get an existing points system back on track? As a Shopware agency, we can support you with the mechanics, the points ledger and integration with apps, ERP and other systems. Get in touch.