New research reveals that the amount of effort put in by a customer to earn a loyalty programme reward affects the type of reward that the customer then chooses. The more effort required, the more likely a customer is to choose a soft reward (like spa certificates or gourmet dinners) over harder rewards like grocery or gasoline vouchers.
The research was carried out by Ran Kivetz, a Stanford Ph.D. who is now assistant professor of marketing at Columbia Graduate School of Business, and Stanford Graduate School of Business marketing professor Itamar Simonson. Their aim was to understand why customers join loyalty programmes and how they use them.
The work is timely; marketers are realising more and more urgently that a sophisticated understanding of consumer motives and incentives can make or break an effective frequency programme.
Effort influences choice
Kivetz and Simonson's paper examined how the amount of effort consumers must expend to get a reward - how many miles, points or purchases they must accumulate - affects the types of rewards they prefer. They based their work on surveys of 3,100 consumers.
In the surveys, participants were asked to choose between different rewards and decide whether they would join various frequency programmes or not. The programmes were based on real ones and included a car rental programme, a Macy's-style programme and an online shopping scheme. The programme requirements were varied for different participants: 10 versus 20 car rentals, $2,500 versus $5,000 in store purchases, or 12 versus 24 online purchases.
Interestingly (but not entirely surprisingly) when the programme requirements were high, more consumers chose luxury items. For example, when the frequent Internet shopper programme required only 12 online purchases to receive a reward, 51% of the participants chose the luxury item. But among those who were told they had to make 24 online purchases for a reward, 73% chose the luxury.
"Consumers seem to feel more entitled to luxury goods when they 'earn' the right to indulge by exerting effort," says Kivetz.
Underlying psychology
Previous researchers have shown that many people find it harder to buy luxury items than essential items; the feeling of guilt evoked may actually detract from the pleasure of acquiring the item. It may well be that some reward programmes achieve success by their ability to provide luxury experiences without the high psychological cost of buying them.
In this research, in examining the psychology behind their findings, Kivetz and Simonson discovered that guilt about consuming luxury items plays an important role in consumer preference toward rewards.
When they asked participants in one survey to rate themselves in terms of how guilty they felt about purchasing luxury items in general, they found that the effect of effort on which rewards were chosen was strongest among people who reported the most guilt about purchasing luxuries.
It was also stronger among consumers who said that their efforts to earn rewards were usually made in the context of work rather than pleasure, such as renting a car for work rather than vacation.
Both findings suggest that people believe luxury rewards should be "earned". "Some people need to justify luxuries," says Simonson. "They feel guilty and investing more effort in the programme helps them reduce this guilt."
What makes them join?
But how much influence does the actual reward have on whether consumers would actually take the step of joining a loyalty programme or not?
The effect was significant. Increasing the programme requirements when a luxury reward was offered did not influence the likelihood of respondents joining the programme. But increasing the requirements when a necessity reward was offered led to a significant drop in respondents who said they would join. Repeated experiments with a variety of loyalty schemes produced similar results.
The research has relevance to the design, targeting and promotion of frequency programmes. "One main implication is that, for a low amount of points or requirements, you want to offer relatively more necessity rewards," says Kivetz. "For higher requirements you want to increase the relative amount of luxuries in the reward mix."
The authors suggest that tiered programmes are one solution. For example, a supermarket might offer a US$50 food voucher for consumers who spend a total of $2,000. But consumers who spend $20,000 can be given the option of earning a three-day trip to Las Vegas. In addition, "a company could personalize the rewards depending on the members' individual level of effort," says Kivetz.
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