The value of loyalty reward programmes and incentive stamp card programmes has been questioned by research from the Stanford Graduate School of Business, which suggests that such programmes can have very limited effectiveness or - even worse - simply end up costing companies money.
According to Brian Viard, assistant professor of strategic management at Stanford Graduate School of Business, the question is whether or not reward programmes do actually encourage customers to buy more often after they have accumulated a lot of credits toward a reward.
Analysing data from a reward programme offered by a southern California golf course, he and Wesley Hartmann, assistant professor of marketing, found that the lure of getting one round of golf free for every ten played only motivated a small fraction of customers to play more frequently when they were about to earn a reward - and these were infrequent players. The heaviest golf players (those responsible for the majority of the course's sales) did not change their playing frequency as they approached a reward.
It must however be noted that golfing purchase behaviour can be very different from that exhibited by consumers in most other sectors.
Hartmann and Viard analysed purchasing behaviour over a year, noting how players timed their games when they were further away and closer to obtaining the free 11th game. They also studied how often heavy users played who cycled through numerous rounds of 10, contrasting their behaviour with that of others who rarely or never earned the reward.
"When the most frequent players got close to the reward, they didn't show any signs of hurrying up their last few games to get the free round, but rather just steadily ploughed through the programme," Viard noted. Hartmann added: "These people valued the reward. They played more. But no more, and no less, than if the course had just lowered the price by 10%."
In other words, for the golfing enthusiast, the reward programme did not hook heavy players into using the course more often when they were about to earn a reward.
Infrequent golfer response
For infrequent players, however, the situation was different. When these players eventually got close to earning the free round (i.e. in the seventh, eighth, and ninth game range) they did accelerate their playing to capture the prize more quickly.
"By the time they were 80% of the way there, everything had changed for them," says Hartmann. "At that point they viewed the programme as offering a substantial discount. They suddenly became more loyal to the firm to get the reward."
Pandering to penny-pinchers?
Extrapolating further, Hartmann and Viard suggest that reward programmes work as intended only if a firm's heavy buyers are also the most price-sensitive customers. In the case of golfers, the heavy users cared the least about the discount, but got it anyway. But while a discount can be an attractive lure to light users, the concept behind most frequent buyer programmes actually excludes many of them from the prize.
Whether rightly or wrongly (a decision that can only be made in specific circumstances for each loyalty programme operator) a more direct reward programme concept could be one that segments the "penny pinchers", Viard suggested: "A campus coffee shop might make more money with a programme that offers one free coffee for every ten to students with an ID only, but not to faculty or staff. Students, who are more price conscious, might make the effort to stick with that coffee shop instead of going to another."
Hartmann and Viard's research, based only on the field of golf player loyalty, certainly contradicts the views of most loyalty marketing experts, economists and psychologists who have studied the reward programme phenomenon, suggesting that these groups have failed to understand how a company's most frequent customers respond to a reward programme. If their findings were to hold true in other industry sectors (such as retail, entertainments, and travel) Hartmann and Viard are effectively suggesting that loyalty programmes - and the invaluable behavioural data they gather - should be abandoned in favour of stamp card incentives.
There are of course times when a stamp card programme is appropriate, but there are many more circumstances under which a carefully planned, tiered, and well-executed loyalty programme provides benefits not only to the operator (in terms of growth, profit, and customer lifetime value) but to the consumer (in terms of better service, personalisation, and a smoother customer experience). These arguments are discussed in detail in The Loyalty Guide report (published by The Wise Marketer) - click here for details.