Loyalty Programs: Of Rats and Men
It seems like everyone has a loyalty program these days. Buy a cup of coffee, and you get a punch card that promises a free cup after you purchase some number of additional cups. Shop at the grocery store, and you get points to reduce the price of gas. Our wallets bulge with partially punched cards, and our keyrings are stuffed with plastic bar code tags, all in the name of loyalty. (And, of course, you have to add the original loyalty programs – airline frequent flyer clubs and credit card reward programs.) Do these actually work?
The short answer is “yes.” Researchers in Singapore found that consumers were indeed motivated by loyalty programs. They used credit cards, which they considered to be an ideal test because the credit card market is “characterized by undifferentiated offerings with virtually zero switching costs between different cards a customer has in the wallet.” Credit cards with reward programs perceived to be attractive were indeed more effective in gaining a larger “share of wallet.” That is, people used those cards whose rewards programs they preferred more often than other cards. (How Effective Are Loyalty Reward Programs in Driving Share of Wallet? by Jochen Wirtz, Anna S. Mattila, and May Oo Lwin.)
Boosting Loyalty Program Effectiveness
So what do rats have to do with loyalty programs? Well, back in the 1930s, researchers made an interesting discovery: rats running a maze to reach food ran faster as they got closer to the food. This finding led to the “goal gradient hypothesis,” which states that the tendency to approach a goal increases with proximity to the goal. Simply put, the closer the goal, the more effort you expend to get there.
A few years ago, Columbia University researchers examined the goal gradient hypothesis using unwitting human subjects, and found that people behave a lot like rats. Give them a coffee punch card that rewards them with a free coffee when full, and they will drink coffee more frequently as they approach a fully stamped card. Here are four of the major findings in that study:
(1) participants in a real café reward program purchase coffee more frequently the closer they are to earning a free coffee;
(2) Internet users who rate songs in return for reward certificates visit the rating Web site more often, rate more songs per visit, and persist longer in the rating effort as they approach the reward goal;
(3) the illusion of progress toward the goal induces purchase acceleration (e.g., customers who receive a 12-stamp coffee card with 2 preexisting “bonus” stamps complete the 10 required purchases faster than customers who receive a “regular” 10-stamp card);
(4) a stronger tendency to accelerate toward the goal predicts greater retention and faster reengagement in the program.
[From The Goal-Gradient Hypothesis Resurrected: Purchase Acceleration, Illusionary Goal Progress, and Customer Retention by Ran Kivetz, Oleg Urminsky, and Yuhuang Zheng.]
One of the most interesting findings is #3. We perceive progress as a percent of completion, so providing someone with a “head start” can be an effective boost to a loyalty program. A plane ticket that requires using 25,000 frequent flyer miles would not seem as “close” as one that requires 35,000 miles but in which the customer starts with 10,000 miles. Coffee shops should consider adding a cup or two to their cards, but having their staff give an equivalent number of bonus punches upon first use. Not only will the card seem more complete, but the establishment will get credit for being generous.
Obviously, for a loyalty program to work, there are a couple of key factors:
- The underlying product or service must be at least comparable to the competition in the eyes of the consumer.
- The rewards offered must be attractive to the consumer.
- Brand preferences and other factors may trump loyalty programs.
- “Switching costs,” i.e., sacrifices that consumers must make to change brands, may increase loyalty to the current brand and reduce the impact of competing loyalty programs. Effective loyalty programs may themselves represent a switching cost.
Given those caveats, it remains true that moving people toward a reward goal quickly will keep them motivated and loyal.
Great post Roger. I wonder if any of the old Skinnerian rules might be active here too… Let’s see, this would be a fixed ratio reinforcpement schedule… If the rat gets rewarded every 12 button presses that encourages them to press. It’s fixed in that it is every 12, and its a ratio schedule, meaning it’s based on number of presses, not a time interval. Of course, not as powerful as variable ratio schedule (reward is based on button presses, but the rat doesn’t know which press will give the reward… # 1 or #12 or #6, etc.) Variable ratio schedules are the most powerful (think slot machines), but even fixed are powerful.
Interesting thoughts, thanks. Susan’s comments made me think. Fixed reinforcement schedules, ratio or interval, are the most effective at shaping a new behaviour. Once the behaviour is acquired or established, variable schedules are the most effective at maintaining the new behaviour. If credit cards used the headstart idea, and then introduced a fixed ratio schedule which allowed additional bonus points for each transaction to develop the behaviour they want (using the card) this would encourage use. Now they’ve trained me AND moved me closer to the goal. Then if they move me to a variable schedule to maintain my new behaviour at a time when I’m more motivated because I’m closer to the goal, then they’ve provided me a powerful reinforcement schedule to continue. This way, they could begin me with 10,000 of 45,000 points, bonus point me to 30,000, and variable schedule the rest. I’m hooked, they’ve lost nothing. I wonder…
Great points, Susan and Brendon. With so many loyalty programs out there, I expect we’ll see some out-of-the-box thinking going forward.
I’m in several hotel loyalty plans, and they are constantly changing up the reward rate and offering special bonuses, e.g., double points for your next stay, a 3000 point bonus if you reserve now, etc.
i find this stuff really fascinating
if i were a marketing tactician, i would be eager to test and apply these findings in my rewards program
as a brand strategist, i wonder about the long-term effects (in full disclosure, i naturally tend to be skeptical about so-called loyalty programs from my personal experiences with disappointing programs like american aadvantage, etc.)
i would be curious to know whether these tactics actually change attitudes and people’s brand affinity or whether they simply change behaviors — in my experience with change-related initiatives (whether at the individual or corporate level), people revert to previous behaviors when the rewards for new behaviors are removed unless that behavior change is accompanied by attitude change
if the cheese is removed, rats will not only stop running faster for the cheese, they’ll eventually stop running at all, right? so the same goes for people.
if marketers use reward programs to change attitudes as well as behaviors, then that would satisfy their name: “loyalty”
What a great discussion. Yes, the rats will stop, and so will people. However, given that people are more complex than rats, there are other factors as you note. Try this.
Behaviour changes can easily lead to attitude changes. If my behaviour differs enough from my attitude then I experience dissonance, and to remove it I adjust my behaviour to suit my attitude (revert), or adjust my attitude to suit my behaviour (convert). I really must like this loyalty program, right? Why else do I stay with it? And here’s the crux.
If the behavior change is big enough and persistent enough, I have to shift my attitude. The bigger the change, the more fiercely we’ll defend it. Voila. Now I’ve internalised the brand and am intrinsically motivated for it. i don’t need a reward anymore, but if I get them (variable schedule) then it just confirms all the wonderful things I think about the brand!
The trick is to make the behaviour change significant in size, and to persist with it over time. If I’ve been behaving as you want me to, I have to bring my attitudes into line. After all, how else do I explain why I have been behaving like that? I must agree with it, right?
Sometimes, an ongoing loyalty incentive may be the best way to attract customers and also discourage switching. Frequent flyer programs, hotel programs, credit card loyalty programs are all more or less permanent in nature. The lower the strength of the brand and the smaller the distinction between products (e.g., credit cards), the more important the ongoing loyalty program may be.
In contrast, I’ve seen several coffee and restaurant programs that were intentionally short term in nature. They encourages sampling and then return visits, but eventually expired when the store had developed a base of regular clientele.
Loyalty is so difficult to execute! The intersection of loyalty programs and the actual CUSTOMER EXPERIENCE is absolutely key! You cannot be a platinum member of a department store loyalty program and not experience any enhancements in customer service when you visit! But to make an impact on customer experience, the Loyalty program leader must be at the same level in heirarchy and must have a say which “counts” at the board level! Without a leader at that level, a loyalty program run as just another marketing intervnion does not have a hope!
As life-time nonprofit marketer, I’m often surprised at how the more “advanced” for-profit sector marketers miss the obvious.
I was most surprised by Denise Lee Yohn’s comments:
“i would be curious to know whether these tactics actually change attitudes and people’s brand affinity or whether they simply change behaviors — in my experience with change-related initiatives (whether at the individual or corporate level), people revert to previous behaviors when the rewards for new behaviors are removed unless that behavior change is accompanied by attitude change.”
In this case, she (and most everyone else) seems to have lumped together increased product use with brand loyalty. Yes, the rats will probably stop buying (more) coffee if the loyalty is taken away. But the brand question is: will they start buying their coffee somewhere else as a result? The answer is probably “no”, unless they have a bad customer experience to match.
As a nonprofit marketer, I am foremost interested in continued support, since increased support tends to be a by-product of loyalty, not a behavior driven by premium. The original intention of loyalty programs was just that, loyalty. Increased consumption was an added benifit. Great.
But as Roger Dooley says, don’t confuse the cheese with the maze.
World Wildlife Fund
On #3, back in the late 70s I’d go to the grocery store with my mother who would receive ‘green stamps’ to put in the store’s stamp booklet.
Once filled, you’d exchange it for a new ’empty’ booklet and get a discount on your current purchase.
I remember the first page of the new stamp booklet being ‘pre-loaded’.
Thanks to you, decades later I finally get it 🙂
Although I recall Green Stamps, I didn’t recall the “prefilled page” part. That’s brilliant, as the books were quite large and somehow having the book partly completed would make the task of filling it less daunting. The Green Stamp people may not have had access to the research I described, but clearly they had good instincts for what would work. Thanks for sharing that, Victor!