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.

So what does this have with loyalty programs? 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.

Obvioiusly, 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.

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