Switching a loyalty currency from a points-based system to prepaid credits is one of those strategic choices I get asked about a lot. On the surface it looks like a cosmetic change — just rename “points” to “credits” — but in practice it reshapes customer psychology, cash flow and how you measure profitability. I've helped several SMEs run the switch (and decide not to), so below I walk through a practical profitability decision test you can use to decide whether your business should make the move.
Why this decision matters
Points systems and prepaid credits both aim to increase retention and spend, but they work differently. Points are typically earned and redeemed with a perceived “free” reward structure (earn 100 points, redeem for £10 off). Prepaid credits are effectively store credit customers buy or top up in advance (e.g., deposit £50, get £60 credit). That difference changes:
Cash flow: Prepaid credit brings cash into your business before the service or product is delivered.Perceived value: Credits feel like money customers can spend freely; points often feel like a gamified reward.Breakage and liability: Points sit as future liabilities on your balance sheet; prepaid credit may be treated similarly but with clearer short-term cash benefits.Redemption behaviour: Credits tend to increase average order value (AOV) and frequency differently than points.The profitability decision test — the checklist I use
Below is a practical decision test you can run in a spreadsheet or your analytics tool. You don't need perfect data — directional inputs are fine — but you do need honest numbers about behaviour and unit economics.
Current loyalty economics: CAC for loyalty members, incremental AOV, incremental purchase frequency, average margin per order.Points accounting: Points issued per £1 spent, current redemption rate, breakage rate, average discount value per redemption.Customer segmentation: Percent of customers who are likely to prepay (loyalists, regular purchasers) vs. occasional buyers.Cash and working capital needs: How valuable is immediate cash to your growth or survival?Operational cost to switch: Platform change, communication, potential refund rules, legal compliance.Step-by-step profitability calculation
Run these steps for a typical customer segment or cohort. I recommend starting with your top 20% most valuable customers and one representative mid-tier segment.
1. Baseline loyalty uplift per customer (points): Calculate incremental revenue per loyalty member attributable to your points program (AOV uplift × frequency uplift × margin).2. Cost of points per customer: Sum the monetary value of points redeemed plus admin costs and marketing allocation.3. Net profit per loyalty member (points): Baseline uplift − cost of points.4. Model prepaid credit scenario: Estimate the percentage of customers who would prepay, average prepaid amount, bonus credits given (e.g., “Top up £50, get £60”), and redemption usage within a meaningful time window.5. Cash-on-hand benefit: Multiply expected prepaid amount by the proportion of customers likely to prepay — that cash can be used immediately for inventory, ads or operations. Quantify this as NPV or working capital value.6. Profit per customer (prepaid): Incremental uplift from credits (AOV/frequency changes) + NPV of prepayment cash − cost of bonuses and admin.7. Compare net profit per customer (points vs prepaid). If prepaid yields higher net profit and the switch doesn’t create unacceptable churn risk, it’s worth pursuing.Benchmarks and rules of thumb I use
When running the numbers, these practical thresholds help me decide:
If prepay take-up > 10% among active customers: It usually makes financial sense because the immediate cash inflow materially improves working capital.If breakage on points > 30%: Your points liability is effectively subsidising future sales; prepaid credits can convert perceived free value into real cash.If incremental margin contribution from prepaid credits > incremental margin from points by at least 5 percentage points: The switch likely improves profitability after accounting for operational costs.If prepaid boosts AOV by 15%+ among users: That typically outweighs the cost of small bonus credit incentives (e.g., 10% top-up).Risks and mitigations
Switching isn’t risk-free. Here are risks I’ve seen and how I mitigate them:
Cannibalisation: Customers who would have bought anyway might simply prepay and not increase total lifetime spend. Mitigate by structuring bonuses to encourage incremental spend (e.g., bonus credits that only apply above average order value).Regulatory and accounting complexity: Prepaid credit can be treated differently under consumer protection law and accounting rules. Check with finance/legal early.Customer perception: Some customers prefer the gamification of points. Test messaging and keep or layer a points-like experience for casual buyers.Operational friction: Refunds, abandoned credit balances, and expiry policy can complicate customer support. Define clear T&Cs and automate balance management.Implementation test: A small experiment I recommend
Before switching nationally, run a controlled experiment with a segment (e.g., a region, VIPs or an email cohort). Here’s a simple A/B test structure I’ve used:
Control (Points): Current points offer and mechanics.Treatment A (Prepaid soft launch): Offer a prepaid product with a small bonus (10%) and monitor take-up, AOV, frequency and churn for 3 months.Treatment B (Hybrid): Offer both: customers can choose to keep points or buy credits — track migration rates and longer-term engagement.Collect these KPIs:
Prepay take-up rateIncremental AOV among prepay usersRedemption velocity of prepaid creditsChurn rate difference vs controlOperating cost per transaction | Metric | Threshold/Good sign |
|---|
| Prepay take-up | >10% |
| AOV uplift (prepay users) | >15% |
| Incremental margin improvement | >5pp vs points |
| Churn impact | No material increase |
Real-world example (anonymised)
I worked with a mid-sized online gift retailer that ran a points scheme with a high perceived value but low breakage — customers redeemed quickly at low margins. We modelled a prepaid credit with a 10% bonus for top-ups. In the pilot, 12% of active customers pre-paid, their AOV rose 18% and redemption velocity matched product margins. The immediate cash allowed the retailer to pre-buy seasonal stock at a discount, improving gross margin further. After accounting for the bonus cost, lifetime value per prepay customer increased by ~9% versus the points baseline.
Operational checklist for a smooth switch
Map legal/accounting implications with finance.Design package offers (e.g., £25 -> £28 credit) and expiry rules.Communicate clearly to customers — explain benefits and how credits work.Update UX so credit purchase is frictionless (one-click top-up on product pages).Train support team on new processes and refunds.Track the KPIs listed above and be ready to roll back or iterate.Switching from points to prepaid credits can be a significant lever for both improving cash flow and sharpening customer value, but it needs to be justified with data. Run the profitability decision test, pilot carefully, and design offers that drive genuinely incremental behaviour. If you want, I can help you build the spreadsheet model and run a pilot design for your specific data — tell me your key metrics and I’ll sketch the calculation for you.
