The Points Illusion
How Loyalty Rewards Outsell Discounts
Mark Sage - 11 min read - 29/03/2025
Conventional wisdom says the best way to drive sales is to cut prices. Give people a discount, and they’ll buy more. Right?
That’s what we thought — until we tested it.
What we found instead was that customers often spend more when you give them less. Not less product, but less value. Specifically — loyalty points. Tiny, future-facing, psychologically powerful.
Within promotional marketing, trade-driving discount activity — which is typically product or category-led — tends to dominate. It’s easier to understand (“sell more of this product”) and easier to fund (“get the supplier to pay for it”). We look down the promotional funnel at the product we want to sell, and work backwards to design the offer and messaging to sell it.
But products don’t sell themselves — they need a consumer to, well, consume them.
If we pause and look the other way up the funnel, we’ll see a customer there. Our aim as retailers (and as businesses) should be to maximise value both for, and from, that customer — not simply push product.
This is where points come into play. With points, you’re not discounting the current product or basket; you’re casting a spotlight on it. Making it part of a broader customer journey and a different customer led conversation.
The points earned don’t offset the cost of the current transaction — which means they don’t erode margin. Instead, points are inherently future-focused. They drive behaviour based on goals, tapping into the psychological principle of goal proximity — the closer we feel to a reward, the harder we work to get there.
Think of how we behave in a coffee stamp card program. When we’ve collected 1 out of 10 stamps, we’re passive. But when we’ve got 8 out of 10? Suddenly we’re finding reasons to go back — there’s a coffee with our name on it!
The same thing happens with loyalty points. When a bonus offer gets us closer to a reward — especially one we’ve already been working toward — it doesn’t just feel good. It makes us act. Increasing momentum and purchase behaviour with every basket.
And that’s what we saw in the data - points weren’t just compensation; they were momentum.
Which leads to a classic pricing question. What works better — points or discounts?
This was a question we wanted to answer at yuu Rewards.
So, we put it to the test!
One of the biggest advantages of running a loyalty program is the ability to test what really works. Unlike traditional promotions where results are often ambiguous, a loyalty ecosystem gives you the data and control to run experiments, measure customer behaviour, and refine strategies.
So, just six months after launching yuu Rewards, we ran a series of structured experiments with retailers in the programme to see how different types of promotional mechanics influenced behaviour.
The findings were both revealing, and at times, completely counterintuitive.
We tested two key use cases — acquiring new shoppers from across the wider coalition and increasing spend from existing customers. In both, we found that points, when used strategically, often outperformed discounts in driving both short-term and long-term revenue.
At first glance, discounts had the edge. They generated slightly higher response rates. But when we normalised for incremental revenue per targeted customer, a different story emerged.
Points consistently delivered higher incremental spend per engaged customer than discounts. While discounts encouraged more customers to act, they capped spending at lower levels. Customers redeemed the offer, but their baskets stayed modest.
Points, on the other hand, created a different dynamic. Customers who engaged spent more per visit, resulting in greater overall sales impact.
This pattern held across both acquisition and spend-stretch campaigns. But the spend-stretch test revealed something even more surprising.
When we more than doubled the spend threshold — increasing it from a 30% stretch to 80% — we expected participation to drop. It didn’t. In fact, customers didn’t just meet the higher threshold; they exceeded it. Instead of spending just enough to qualify for the reward, many shopped well beyond the target. This was especially true for points-based promotions.
Instead of capping their spending at the promotional threshold (say $180), many continued to shop beyond the target, driving higher overall sales.
This showed that customers don’t always think in rigid thresholds and instead, a higher goal can act as a psychological anchor, pulling spending up even further and helping to gain further share of wallet.
This though wasn’t the case for discounts, and instead we saw the opposite behaviour.
With discounts, customers spent just enough to hit the threshold (e.g., $180) and then stopped. And the higher the discount offered (say 15% vs. 10%), the closer their spend was to the threshold. In fact, the basket size for the larger discount was about two-thirds of what we saw with the lower-value discount, for the same threshold.
It’s almost as if the more discount we offered, the more “transactional” the purchase behaviour came.
This transactional pattern showed up in participation rates too. The higher discount drove more conversions — twice the participation of the lower one — but those participants didn’t lift their spend as much. The more we focused on highlighting the value, the more the customer focused on maximising return.
Put simply — bigger discounts got more people in, but those people didn’t spend as much.
This wasn’t just a one-off. We did this over multiple waves, with multiple spend thresholds and multiple discounts — and the results were consistent across all of them.
Points behaviour though was wholly different.
With points, it seems the interaction was less transactional and instead, customers seemed to treat points promotions as part of a broader goal.
The value of the bonus points offered didn’t influence participation rates. Across all waves and bonus levels, conversion was consistent — and slightly higher than most discount campaigns
Spend lift, too, was stable. Whether we doubled the bonus or not, uplift remained roughly 200% of the spend target — and was significantly higher than for discount offers.
Whereas the spend lift for discounts differed markedly based on the reward value offered (10% versus 15% discount), for the points bonus there was no change in spend behaviour — it just stayed high.
This suggests customers weren’t evaluating the points in the moment and instead saw them as part of a larger opportunity to earn rewards.
The consistent lift with points, regardless of bonus size, suggests a different kind of value perception — less transactional, more goal-oriented
These results made one thing clear — points can be a powerful tool to increase customer value. But were these results unique to that campaign?
This test wasn’t our first encounter with points vs. discounts. Team members had experience in other markets where points had shown similar strength.
Still, we knew customer profiles and preferences differ across markets. So, we wanted to test the boundaries — what kinds of ask-to-reward ratios worked, and how local retail teams could be brought on board.
But the outcomes weren’t surprising — people are people, and we all have the same psychological biases. This means learnings from other programs, in other markets, are likely to be quite transferable.
Learnings from programmes such as Nectar in the UK, where we’d done similar testing over a decade before.
In one example, a spend activation campaign, we tested two different promotional mechanics — a straight discount (£5 off £25) and a points bonus (“Earn Triple Nectar Points on a £25 shop”). The points offer was worth just £0.38 — a 1.5% rebate versus a 20% discount.
Not only was the points offer much cheaper to run, but it also delivered stronger performance. Spend after the promotion was up nearly 50% for the points group versus just over 30% for the discount group. That’s a 43% indexed difference.
And the benefits lasted. Three months later, 85% of customers who received the points offer were still active, compared to 80% in the discount group.
We also heard similar insights from Tesco Clubcard. A former Dunnhumby executive told us, “The best ROI offer at Tesco Clubcard was always double points on a basket threshold.”
Different markets, different programmes, different time — same results.
Could this be a slam dunk for points?
Well, there was one area where discounts had the edge - conversion.
Customers were about 10% more likely to redeem a discount than a points promotion. While the spend lift was lower, the higher conversion closed some of the gap — particularly for acquisition campaigns.
If your goal is market penetration — getting new customers in — discounts might perform better. If you’re looking to increase market share by driving bigger baskets from existing customers, then points offer a significant advantage.
This does though make sense.
A discount is money in your pocket today — something tangible that you don’t want to waste. They essentially lower the psychological barrier to entry, making it easier for customers to convert. This effect would be even more pronounced for “new to brand” customers as a loyalty programme would have significantly less appeal. You’d have no invested value and so no goal proximity effect, meaning that money really does talk.
Points, on the other hand, are future-focused, and so impact existing customers more, driving consistently bigger basket sizes. They don’t create the same immediate urgency and so conversions rates can be slightly lower — whether spend stretch for existing customers or activation of new / light buyers — but they ultimately drive bigger spend lifts.
This highlighted a fundamental truth — discounts drive urgency; points drive quantity and long-term value.
If points work so well though, when should we use them and should we use them more?
There is no single “right” answer. Discounts and points serve different purposes.
Use discounts when you need fast conversion, new-to-brand penetration, or immediate impact. Use points when you want to grow basket size, protect pricing, and build loyalty.
To quote Scott Galloway, companies must be careful about “juicing the bottom line” with discounts. They may boost short-term sales but erode margins and train customers to expect lower prices.
Perhaps the most surprising finding was how effective points were despite their lower monetary value
Across acquisition and spend-stretch campaigns, points consistently drove greater incremental spend per customer — even when the reward value was a fraction of the cash equivalent.
On paper, this shouldn’t make sense — why would a customer be more motivated by a reward that’s worth less?
The answer lies not in the reward math, but in the psychology of how people perceive value. Behavioural economics teaches us that consumers don’t treat all value equally. Context, progress, and mental framing matter more than math.
A key principle here is mental accounting.
As Richard Thaler and others have shown, people treat points and money differently. We keep separate mental ledgers and don’t always convert between them accurately. Instead of calculating the real-world value (“3,300 points = $1.65”), we assess it in emotional and contextual terms — “That gets me closer to a free reward” or “I’m earning something extra.”
That was exactly what we saw at yuu Rewards. Doubling the bonus points (different currency) didn’t change participation or spend. In contrast, changing the discount value (same currency) had a huge impact.
Customers saw points differently. The mix of a cash spend threshold with a points reward created a different dynamic than a straight discount.
This is supported by academic research, like Drèze and Nunes’s study on dual-currency pricing, which found that “combined-currency prices are designed to minimize the psychological cost associated with a particular revenue objective by taking advantage of people’s inability, reluctance, or lack of desire to convert amounts assessed in one currency to denominations of the other currency” — it seems that this lack of multi-currency assessment may be to our advantage.
It certainly helps to explain why a modest bonus points offer outperformed a 10% discount. The discount was absorbed as a minor price cut. The points, however, were interpreted as free value, something to be banked for future enjoyment.
Even if the math didn’t support it, the feeling of earning proved more powerful than the act of saving.
There was another factor at play here too — the numerosity effect, which can mean people perceive larger numbers as more valuable simply because they are larger.
You can see this at play in the UK with the Nectar and Tesco Clubcard loyalty programs. Both programs give 1 point per £1 spend, and both programs perform well in the market. In a survey of cardholders asking if you “can use the points to save money on everyday goods”, 68% of Tesco Clubcard users agreed with this statement and 74% for Nectar.
Yet, Nectar points are actually worth half the value of Tesco Clubcard — giving just 0.5% per point versus 1% for Tesco Clubcard.
So, despite giving half the value, the consumer perception in terms of helping to save money is higher.
There are two key principles are play here.
Principle 1 — Earn Rate Anchoring
When Nectar launched, they anchored their points earning rate to Tesco — using 1 point per £1 — and relied on the fact that consumers wouldn’t calculate the underlying value and would simply map their perception of value across from what they already knew. They have the same earn rate, so they must have the same value.
We did this with yuu Rewards too, making sure our headline earn rate of 1 point for $1HKD was higher than competitor programs in the market. Even if the underlying return value was similar, due to the numerosity effect, the earn rate simply makes the program look more generous. You get more points, more quickly!
Principle 2 — The Decoy Effect
Both Nectar and Tesco Clubcard are using a larger number to represent a smaller one, and this is the numerosity effect in action.
The actual value earned per point for Nectar is £0.005p per point — but you don’t see it shown like that. Instead, by associating 1 point to £1, they are using this larger number to both mask and influence the overall perceived value — 150 points from a £150 shop just feels better than £0.75p. In a sense, this larger earn value is acting as a decoy, drawing the consumers attention away from the hidden actual value.
This is not unique to Nectar — you see it in almost all loyalty programmes. Whether retail schemes or frequent flyer miles.
So, managing the numerosity effect is key to managing value perception and underlying loyalty cost!
And then there’s the pain of paying. Cash outflows feel like losses. Discounts reduce that pain, but they also highlight it. Customers still see the price. With points, there’s less emotional friction. Points are framed as gains, not reductions. Earning feels good. Redeeming feels like a reward.
Points also have a more flexible value perception, so when combined with the goal proximity effect, consumers tend to value points more, the closer they feel to that reward.
These mechanisms — goal proximity, mental accounting, numerosity, pain of paying— all help explain why points drove larger basket sizes.
It wasn’t an accident — instead it was the result of deep psychological mechanisms at play which ensured that customers weren’t just chasing savings, they were engaging in a feel-good cycle of earning and progressing.
Loyalty doesn’t replace price as the main lever, but it can reshape how price is perceived. By layering in sunk costs, future value, and psychological urgency, loyalty softens price sensitivity and makes everyday transactions feel more rewarding.
When marketers understand these biases and build programs that work with them — like we did with yuu Rewards — loyalty becomes more than a tactic or a gimmick. It becomes a powerful tool for pricing, engagement, and long-term customer value.
In the end, it’s not just about the gain — it’s about the goal.
And in loyalty, goals win.