Cash-Back vs Points-Based Rewards for Retailers

Loyalty programs are powerful tools that help retailers connect with customers and drive repeat purchases. Data shows that customers loyal to a brand spend 67% more than those who aren’t. (Business.com)

Household names like Starbucks, Sephora, and Target have leveraged loyalty programs to create deeper customer relationships and foster long-term brand loyalty. Yet, with so many options available, it’s essential for retailers—big and small—to carefully consider which type of program, whether cash-back or points-based, will best resonate with their customer base and align with their business goals.

Understanding how each approach works and which will best support your unique positioning, margins, and sales channels can set the foundation for a successful loyalty strategy that keeps customers coming back.

Cash-Back Programs

Cash-back programs in retail typically work by offering customers a percentage of their purchase back in cash or store credit. The amount can vary by store or promotion, and it's usually applied as a gift card on a future purchase rather than cash in hand. Customers are incentivized to return to the store to redeem their rewards, creating a cycle that encourages repeat visits.

Here’s how it generally operates in a retail setting:

1. Earned at Checkout: Customers receive a set percentage of their purchase total as cash-back, which can be stored in their account, on a loyalty card, or added to their next transaction.
   
   
2. Redeemable as Store Credit: The cash-back amount typically accumulates and can be used as a credit redeemable on future purchases once it reaches a certain threshold.
   
   
3. Instant or Delayed Rewards: Some retailers allow customers to use cash-back instantly on the next transaction, while others may set a redemption cycle (e.g., monthly or after a certain amount is earned).
   
   
4. Tiered Cash-Back Programs: Certain retailers may offer higher cash-back rates to customers in specific tiers, rewarding those who spend more with greater benefits.

Above: Walmart & Target run cash-back programs.

Examples of Household Brands with Cash-Back Programs

1. Costco: Through the Costco Anywhere Visa Card, members can earn up to 2% cash back on in-store purchases and higher percentages on other categories, like 4% on gas. Members receive their cash-back rewards annually as a rebate they can use in-store or cash out.
   
   
2. Target: Target's RedCard holders get 5% cash back on purchases. This discount is applied directly at checkout, which essentially feels like cash-back since it lowers the overall transaction cost every time the card is used.
   
   
3. Best Buy: Best Buy has a My Best Buy loyalty program where members can earn 0.5% cash back on most purchases, which is accumulated as points and can later be redeemed as a certificate to be used as a store credit.
   
   
4. Amazon: Through its Amazon Prime Rewards Visa Signature Card, Amazon offers Prime members 5% cash back on purchases at Amazon and Whole Foods, and a lower cash-back percentage at other locations. This reward is accumulated as points (but still functions as a cash-back program), which can be redeemed as discounts on future purchases.
   
   
5. Kohl's: Kohl's Cash is a form of cash-back where customers earn “Kohl's Cash” during promotional periods (usually $10 for every $50 spent). The earned cash-back can only be redeemed during a specific redemption window, encouraging repeat visits.
   
   
6. Walgreens: Walgreens' myWalgreens program offers customers cash rewards based on their purchases, which can be accumulated in their loyalty account. These rewards can be redeemed for discounts at checkout on a later visit.
   
   
7. Dick's Sporting Goods: The ScoreCard Rewards program allows customers to earn cash-back points on purchases, which they can redeem as store credit for discounts on future purchases.
   
   

Benefits and Drawbacks of Cash-Back Programs

Pros of Cash-Back Programs:

1. Simplicity: Cash-back programs are appealing because they’re simple to understand and deliver clear value, making them a popular choice for retailers to drive loyalty without requiring customers to spend time calculating points or converting rewards.
   
   
2. Immediate Value: Cash-back feels like “real” money, so it often motivates quick repeat purchases.
   
   
3. Lower Barriers to Entry: Customers may feel more confident joining a program that promises tangible cash benefits over abstract points.
   
   

Cons of Cash-Back Programs:

1. Costly for Small Retailers: Since each transaction involves a guaranteed cash reward, it can eat into margins, especially if the reward rate is too high.
   
   
2. Less Brand Engagement: Cash-back programs can feel transactional. They don’t build as much emotional attachment or brand loyalty compared to points that customers can redeem for exclusive perks.
   
   
3. Liability: Since cash-back programs are treated similar to gift cards, you’ll need to ensure you’re accounting for the total amount of credit issued, and ensure your accountant has access to any liability reporting required. That’s because customers could choose to redeem all their credit within a single month.
   
   

Points-Based Programs

Points-based programs work by allowing customers to accumulate points on purchases, which can then be redeemed for rewards like discounts, free items, or exclusive benefits. The program is often tiered, meaning the more a customer shops, the faster they earn rewards, which creates an incentive for continued shopping and larger purchases. Points programs are particularly effective in retail because they encourage repeat visits and deeper brand engagement.

Here’s how a points-based loyalty program typically functions in a retail environment:

1. Points Accumulation: Customers earn points based on the amount spent, such as one point per dollar. Some programs offer extra points for purchasing certain products or shopping during special promotions.
   
   
2. Redemption System: Accumulated points can be redeemed for rewards. This might be store credit, discounts, free products, or exclusive experiences, depending on the retailer.
   
   
3. Tiered Benefits: Many points-based programs include tiers (e.g., Silver, Gold, Platinum) that offer greater rewards as customers reach higher spending or points thresholds. Higher tiers often come with perks like faster points accumulation, early access to sales, and exclusive offers.
   
   
4. Behavioral Incentives: Some retailers award points for actions beyond purchases, such as signing up for the program, referring friends, engaging on social media, or writing reviews.
   
   

Above: Sephora and Nordstrom run points-based loyalty programs.

Examples of Household Brands with Points-Based Programs

1. Sephora (Beauty Insider): Sephora’s Beauty Insider program is one of the most recognized points-based loyalty programs. Members earn points for every dollar spent, which can be redeemed for mini products, discounts, or access to special experiences. The program has three tiers: Insider, VIB, and Rouge, each offering progressively better rewards and benefits as members spend more.
   
   
2. Starbucks (Starbucks Rewards): Starbucks’ rewards program allows customers to earn “Stars” on purchases through the app or with a registered Starbucks card. Stars can be redeemed for free drinks, food items, and merchandise. Frequent customers reach Gold status, which unlocks exclusive offers, free refills, and personalized perks.
   
   
3. Nordstrom (Nordy Club): Nordstrom’s Nordy Club members earn points on purchases, which accumulate faster at higher tier levels. Points can be redeemed for “Nordstrom Notes,” which act as store credits for future purchases. Higher tiers gain access to perks like early sale access, free alterations, and personal styling services.
   
   
4. Ulta Beauty (Ultamate Rewards): Ulta’s Ultamate Rewards program allows customers to earn points for every dollar spent, with more points earned per dollar at higher membership tiers. Points can be redeemed for discounts on purchases, and members in higher tiers get birthday gifts, exclusive offers, and access to special sales.
   
   
5. American Eagle (AEO Connected): In the AEO Connected program, members earn points with each purchase at American Eagle and Aerie stores. Points accumulate toward rewards and are redeemable for discounts. Members can also reach a higher tier to receive exclusive benefits, like free shipping and additional discounts.
   
   
6. The North Face (XPLR Pass): The North Face’s XPLR Pass loyalty program allows members to earn points on purchases, attending events, and even bringing in gear for recycling. Points can be redeemed for future discounts and unique experiences like excursions. Members also receive exclusive product previews and early access to sales.
   
   
7. Walgreens (myWalgreens): Walgreens has a points-based system where customers earn points on select purchases and health-related behaviors, like getting a flu shot. Points can be redeemed as store credit at checkout, creating a flexible, customer-friendly way to save on future purchases.
   
   

Benefits and Drawbacks of Points-Based Programs

Pros of Points-Based Programs:

1. Flexibility in Rewards: Points-based programs are highly versatile. Points can be redeemed for various rewards, allowing you to create unique offerings like exclusive products or special experiences.
   
   
2. More Customer Engagement: You can encourage certain behaviors (e.g., repeat visits, trying new products) by offering bonus points. Points feel less like a “fixed” cost to you as a retailer.
   
   
3. Builds Brand Loyalty: A points-based system often feels more like a “club,” where customers are working toward goals, making it more memorable and aligned with your brand. 
   
   
4. No requirement to account for liability: You can change your earning threshold, terms or rewards available for redemption at any time. This means there is no need to account for points issued or redeemed, as you can in theory change these at any time to avoid liability. Further, rewards are treated as discounts, meaning they’re not treated as cash or credit. 
   
   

Cons of Points-Based Programs:

1. Complexity: Customers may find it harder to understand the value of their points compared to cash-back. It’s important to clearly explain the points-to-reward conversion.
   
   
2. Delayed Gratification: Customers might feel less motivated to earn points if the rewards feel out of reach or too abstract.

Which is right for your store?

Choosing the right loyalty program—whether cash-back or points-based—depends on several key factors, including your competitive strategy, product margins, and primary sales channels.

Here’s a breakdown of what works best for different types of stores and business goals:

1. Competing on Price

If your main competitive advantage is price, your customers are likely price-sensitive and may prefer tangible rewards that directly reduce their costs.

• Best Option: Cash-Back Program
  
  
  • Why? Cash-back offers immediate, understandable value that appeals to price-sensitive shoppers, especially those who look for instant savings. Since it lowers the perceived price of their purchase, it aligns with your brand’s emphasis on value.
    
    
  • How? Offer a modest percentage (e.g., 1-3%) that customers can redeem on future purchases, which brings them back without eroding your margins too much.
    
    

2. Competing on Product or Brand Differentiation

If your strength lies in unique products, brand image, or customer experience, a loyalty program that adds depth to your brand and builds an emotional connection with customers is ideal.

• Best Option: Points-Based Program
  
  
  • Why? Points-based programs allow you to create a unique experience that reflects your brand values, such as exclusive products, early access, and unique experiences. Customers see the program as more than just financial savings—it’s part of the brand.
    
    
  • How? Create tiered rewards that add value to the customer journey (e.g., VIP status, birthday rewards, members-only events). Focus on rewards that resonate with your brand’s unique identity, like exclusive or limited-edition items.
    
    

3. Low Margin Products

With low-margin products, giving back a portion of each purchase can quickly erode profitability, so the loyalty program should be structured to minimize direct cost while still attracting repeat purchases.

• Best Option: Points-Based Program
  
  
  • Why? A points-based program allows you to reward customers without necessarily giving them a direct discount on every transaction. You can control when and how points are redeemed, giving you more flexibility in managing costs.
    
    
  • How? Set higher point thresholds for rewards, encouraging larger or more frequent purchases before customers can redeem. Offer rewards with non-monetary value, like access to content, events, or limited-time offers, to incentivize loyalty without heavily impacting margins.
    
    

4. High Margin Products

High-margin products offer more flexibility in terms of how much you can afford to give back to customers, making both types of loyalty programs viable.

• Best Option: Both Cash-Back and Points-Based Programs
  
  
  • Why? You can offer a generous cash-back rate that still leaves room for profitability, or a points-based program with attractive, high-value rewards. A cash-back program could be appealing for high-spend customers, while a points-based system could be customized to incentivize specific behaviors.
    
    
  • How? Consider a hybrid program where customers can choose between earning cash-back or points for unique rewards. Alternatively, give high-value rewards at significant points milestones, such as exclusive gifts or access to premium services.
    
    

5. Primarily In-Store Operations

If you primarily operate in a physical store, customers may appreciate a straightforward, easy-to-use program that doesn’t require digital tracking or extensive sign-ups.

• Best Option: Cash-Back Program
  
  
  • Why? Cash-back programs can be easy to implement with minimal technology and are simple for customers to understand at the register. They offer immediate, tangible savings and are often quicker to redeem in-store without a complex digital setup.
    
    
  • How? Provide a cash-back coupon or store credit based on the transaction amount, which can be redeemed in future visits. You can integrate this easily into POS systems, allowing customers to track rewards on their receipt or loyalty card.
    
    

6. Primarily Online Operations

In an online environment, customers have greater access to their loyalty accounts, so a points-based system with personalization and detailed tracking capabilities can shine.

• Best Option: Points-Based Program
  
  
  • Why? An online environment allows you to implement a more intricate points-based program that’s easily trackable. Customers can see their points balance, check rewards, and engage in bonus activities like social shares or reviews, which can deepen engagement.
    
    
  • How? Offer points for various actions beyond purchases, like signing up for newsletters, leaving reviews, or referring friends. Use the digital platform to make redemption simple and personalized, with offers like discount codes, special products, or early access to sales.
    
    

7. Omnichannel Operations (In-Store & Online)

If you operate both in-store and online, your loyalty program should encourage shopping across channels, promoting an integrated experience.

• Best Option: Points-Based Program with Cross-Channel Rewards
  
  
  • Why? A points-based program works well for omnichannel retailers because it encourages customers to earn and redeem points across both channels, driving traffic to both the website and physical store. It also allows for personalized experiences, no matter where the customer shops.
    
    
  • How? Make sure points can be earned and redeemed both in-store and online. Offer exclusive rewards for shopping on both channels, like bonus points for trying a new channel or special offers for multi-channel purchases. Keep points balances and rewards accessible online, so customers can easily track and use points regardless of where they shop.

Quick Summary

If your focus is on simplicity and quick customer gratification, a cash-back program could be effective, especially if you have high-margin products and can afford the cash-back cost.

If you want to create long-term customer engagement and have the resources to create unique rewards, a points-based program may be more beneficial. This approach allows for more flexibility in how you structure rewards, which can help differentiate your brand.

In some instances, a hybrid approach can work too, where customers earn points with each purchase and have the option to convert them into cash-back once they reach a certain threshold. This gives flexibility and allows customers to choose their preferred benefit.

Understanding Liability: A Key Consideration for Your Loyalty Program

When choosing a loyalty program, liability is crucial for retailers to consider.

Cash-back programs create a cash liability, similar to issuing a gift card. This liability reflects the potential future cost if customers redeem all their accumulated rewards, requiring retailers to track it as a financial obligation. There are a few things that can work in your favor here, for example, unused or expired gift cards, money left on gift cards, and the diminishing purchasing power of gift cards over time. However, these wouldn’t reduce the liability much and would require extra accounting work to estimate and forecast.

For SMEs, the liability of gift cards and all the considerations that come with it can all be complex and costly. You’ll find your cash-back program demands ongoing accounting oversight.

Points-based programs, however, treat rewards as discounts rather than liabilities. Points are intangible and redeemable for discounts or rewards, meaning they don’t appear on the books as future obligations.

This makes them simpler and more manageable, particularly for SMEs, as they avoid the complexity of tracking outstanding liabilities.

For large enterprises with sufficient accounting resources, cash-back programs may work, but points-based options remain preferable for businesses looking for an efficient, low-maintenance loyalty solution.

Please note: In order to understand the impact of these program styles on your business, it’s best to seek advice from a licensed financial adviser in your state.

Final Words

Selecting the right loyalty program hinges on aligning with your business model and understanding what drives your customers. An optimal program will incentivize repeat purchases while fostering a stronger relationship with your brand.

Additionally, liability management is a crucial factor in this decision. Cash-back programs, though straightforward, create a cash liability that must be tracked, adding complexity and financial obligation. Points-based programs, by contrast, avoid these liabilities, making them simpler to manage and often more suitable for smaller businesses. 

Balancing customer engagement with financial considerations will help you choose a loyalty strategy that enhances both your brand’s value and operational efficiency.

Ready to get started with loyalty?

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