Frequency programs (FPs) have been around since 1981. Companies use them to stimulate usage, reward loyalty and increase switching costs. Apparently half of us belong to at least one.
But not all FPs do a good job of encouraging repeat business. Have you ever wondered why? A recent research study looks at psychology literature about the effect of efforts (high vs. low) + rewards (luxury vs. necessity) on behavior and then gathers additional data to try to answer this question.
The authors explain that many FPs are structured with a limited understanding of consumer preference. As a result, the efforts and rewards are out of alignment, as far as target customers are concerned. This research finds that when higher effort is required to earn the rewards, consumers prefer luxury rewards. The authors found that people generally feel guilty about consuming luxuries. But when luxuries are the result of significant effort, the luxuries are guilt-free. This is an especially strong motivator with those consumers who tend to feel more guilt over luxury purchases than other consumers.
For example, if a grocery requires 40 instead of 10 shopping visits to earn a reward, this will increase the preference for a luxury reward (like a massage) over a necessity reward (such as free groceries). And if a luxury reward is not offered, it could discourage a consumer from participating in the program.
Here are the implications for your FP:
Design
Offer different rewards for the different levels of effort you want to encourage. To inspire high effort, offer a luxury reward. A necessity reward of the same value will be less effective. For example, a program rewarding $2,000 of purchases with a $50 voucher should reward $20,000 of purchases with a luxury reward (a trip to Vegas).
Targeting
Try segmenting your customers based on their effort levels or tendencies to feel guilt over luxuries. Identify the customers for whom fulfilling the requirements would be more work, and offer them luxury rewards. If you can determine which socioeconomic or cultural groups tend to feel guilty about luxuries, then the FP can be tailored to groups.
Promotion
If you’re offering luxury rewards, try emphasizing “rewards can be earned through effort,” and that “consumers should enjoy the right to indulge, it’s a luxury they deserve.”
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Source: Ran Kivetz, Itamar Simonson (2002). “Earning the Right to Indulge: Effort as a Determinant of Customer Preferences Toward Frequency Program Rewards”: Journal of Marketing Research. Vol. 39, Iss. 2.