Points or discounts? How to reward repeat customers without losing margin

When a small online store wants more repeat business, the first idea is usually a discount: a coupon in the newsletter, a sitewide sale, 10% off for returning customers. Discounts work in the short term, but they come with a cost that's easy to miss. Points-based rewards are often the better tool. Here's why, and how to set them up so they don't eat your margin.

The problem with blanket discounts

A discount that everyone gets has two downsides:

You pay it to people who would have bought anyway. A loyal customer who was going to order next week gets the same 10% as someone who needed convincing.
It trains customers to wait. If a sale comes around every few weeks, the smart move is to hold off until it does. Your full-price sales shrink.

Discounts aren't bad. A launch offer or a seasonal sale has its place. But as your main way of bringing people back, they're expensive.

What points do differently

With points, a customer earns a little with every order and spends it on a reward later. That changes the deal in three ways:

The reward is earned. Only customers who actually come back get it, so you're paying for repeat purchases, not giving money away.
There's a reason to return. "I'm 30 points away from $5 off" is a reason to order from you again rather than from someone else.
You control the cost. You decide exactly how much a point is worth and what it takes to unlock a reward.

How to price your rewards

The key number is your effective reward rate: what percentage of a customer's spending comes back to them as rewards.

Effective rate = reward value ÷ (points needed ÷ points per dollar)

An example: you give 1 point per $1, and a $5 off reward costs 100 points. A customer has to spend $100 to earn it, so the effective rate is $5 ÷ $100 = 5%.

A few guidelines:

Stay within what your margin can carry. If your margin on a typical order is 40%, giving 5% back on repeat purchases is easy to absorb. If it's 15%, aim lower or set a minimum order on rewards.
Make the first reward reachable. If your average order is $40, a 100-point reward unlocks on the third order. If it takes ten orders, most customers will never get there and the program won't change their behaviour.
Use a minimum order to protect small orders. A $5 reward on a $6 order hurts. A reward that needs a $30 minimum order doesn't.
Offer percentage rewards carefully. "10% off" on a large order can cost more than you planned. Fixed-amount rewards are more predictable.

Should points expire?

Expiry gives customers a reason not to forget about their balance, and it keeps old, forgotten points off your books. But points that vanish too fast feel like a trick. A middle ground most stores are comfortable with: points expire 12 months after they're earned. Active customers never notice, and lapsed ones get a reason to come back before they lose them.

Give people a reason to join

Customers need an account to collect points, so make joining worth it. A small sign-up bonus, for example 50 points, gives new members a head start toward their first reward and gets more people to create an account at checkout.

The short version

Use discounts for occasional campaigns, not as your main retention tool.
Use points to reward the customers who come back, at a rate your margin can carry.
Make the first reward reachable within a few orders.
Keep expiry generous, and give people a small bonus for joining.

Done well, a points program costs you a few percent on repeat orders and gives every customer a reason to make the next order with you.