Forbes Article on Customer Loyalty Programs

January 4, 2007 · 2 comments

This morning I came across an article on called “The Lowdown on Customer Loyalty Programs.” It discusses the findings of a couple of studies by two business professors (one from Wharton, one from USC’s Marshall School of Business) regarding loyalty programs — what motivates people to use them and as a result, how to best structure them.
Some of the authors’ assertions:
- They feel that people would prefer a redemption that involves points plus cash over just points. Their example uses airline points, and they say a consumer would prefer to pay $400 plus 5,000 miles for an airline ticket than either $500 (all cash) or 25,000 miles (all points).
My comment: Really? Ask Betty Crocker how well that worked for them. Oh, that’s right…you can’t! They shut down! The reason people wouldn’t prefer the miles-only option is because so many programs make their cashout levels seem insurmountable. Maybe instead they should provide lower level redemptions at a fair point value. And make the point value consistent — if not one set value for points, at least don’t change point value just because you’re having a bad quarter financially.
- They find that people would prefer miles (points) over cash as a reward. The logic is that cash would be viewed as something people would just use to pay a bill, whereas miles are “something special,” something they’d use to take a trip and make memories. “People don’t consider miles or points to be the same thing as money,” says Xavier Dr�ze, co-author of the study.
My comment: Maybe there’s a difference in mindset between airline miles and rewards program points. But I’d take the cash over the points any day of the week, because cash has a fixed value…and who knows what those points (or miles) will be worth tomorrow. I can make my memories just fine with cash, thank you.
- A program that is structured to make it appear that you are given a head start toward reaching the reward is more attractive to consumers than one that starts them out at square one. Their example: given a choice between “buy eight get one free” and “buy ten get one free and we’ll start you out with two”, people would prefer the latter, even though both require eight purchases.
My comment: I agree with this — people like the idea that they’re getting something for free. See the number of online rewards programs that give you a signup bonus…although you still have to do some sort of activity in order to cash it out.
- In the right setting, points can be motivating even if they have no value except bragging rights. Their example is the popularity of Yahoo Answers, which awards points to members that provide the best answer to submitted questions. These points have no real-world value yet many members are active in accumulating them.
My comment: Ah, yes — “social currency.” It’s the semi-tangible pat-on-the-back that you get in various forms: Reputation points on a message forum, your Ebay feedback rating, the number of friends you have in your MySpace network, Microsoft Achievement Points… If a business can create loyalty with unpaid points, more power to ‘em, but if you ask people which would motivate them more, unpaid points or paid rewards, what do you think they’d choose?
- Members of loyalty programs spend more than non-members, they say. But it’s unclear whether the loyalty program motivates them to spend more, or whether they were already big spenders and they’re simply a member of the loyalty program to get rewards for what they were already doing.
My comment: I’ve predicted this before, and I’ll say it again — well-known national merchants are going to find that they no longer need to pay out commissions to get people to shop. The benefits that rewards programs offer the big merchants are dwindling. People who shop at JCPenney will do so regardless of whether they can earn a percentage rebate by shopping through a rewards program, and JCP is losing money by participating in one. They don’t need the marketing — aside from already having name recognition, the big retailers already allow customers to sign up for their own email marketing promotions. Where rebate sites and other loyalty programs will succeed is in introducing and building sales for lesser-known merchants. These merchants need the marketing assistance, and the commissions they offer (a portion of which rebate program members receive in the form of a rebate) are an enticement for shoppers to try them out.
- The article describes the necessity for loyalty programs to segment their members if they want to survive.
Comment: I agree with this entirely. Gold members care more about being gold members if there are silver members below them (they are given some level of prestige). In addition, consumers in different segments have different characteristics and can be motivated differently. Infrequent shoppers need an incentive to shop (they are your punch-card market — buy 6 bras, get one free). Frequent shoppers might be more attracted to status perks (special discount days, giveaways to status members only, etc.).
Picking on JCPenney again because they are doing some things right: Their standard charge card is black. If you charge over $500 in a year, you get their Gold Card; over $1000 and you get the Platinum. This chart shows the varying perks each card offers. Bigger spenders get more perks, but even the less frequent shoppers (black cardholders) get frequent incentives to shop.
I think this same concept could, and SHOULD, be used with online rewards programs. Members who shop infrequently would receive weekly promotions and standard rebate rates. More active shoppers would qualify for bonuses, higher rates, or special events such as giveaways, combined with some manner of social currency to convey status (for instance, a monthly top rebate-earners leaderboard).
Currently, there is little loyalty among loyalty program members — many people just shop where they’ll receive the highest rebate, or if they do stick with one or two programs, it’s because they want to ensure that they’ll reach the minimum payout. Rewards programs are missing the boat when it comes to creating member loyalty. Treat members fairly, offer competitive rates, and BEYOND that, give members a reason to stick with your program and yours alone.
As always, I welcome your comments.

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{ 2 comments… read them below or add one }

jameswalt January 5, 2007 at 2:09 pm

I disagree with your opinion over the following comment:
“They find that people would prefer miles (points) over cash as a reward.”
I agree with their opinion that members DO prefer miles or points over cash. There are many people who would rather receive cash, but there are even more people who would rather receive non-cash, because it is like getting money that you have to spend on “fun” things.
If that weren’t the case, then there would be no market for gift cards. Gift cards are a massive market, and it’s because of this same concept – when you receive a gift card, you’re receiving a pre-purchased object or gift. When you get cash, it also comes with the guilt of saving or billpaying. Many people who enjoy spending money would rather receive a gift card or “points”, because they know they HAVE to buy something they enjoy, instead of using it for more productive means.


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