How consumers interpret loyalty rewards

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By: Wise Marketer Staff |

Posted on October 27, 2010

How consumers interpret loyalty rewards

A great deal of research at Virginia Tech's Pamplin College of Business has gone into the study of how consumers view the rewards they can earn from different loyalty programmes, culminating in the forthcoming publication of the findings of a study by marketing assistant professor Rajesh Bagchi and master's graduate Xingbo Li.

The authors suggest as an example the comparison between two grocery store loyalty programmes. One offers 10 loyalty points for each US$1 spent, and a subsequent discount of US$6 after earning 1,000 points. The other offers 1 point per US$1 spent, resulting in a US$6 discount after earning 100 points. Bearing in mind that the actual spending-to-reward ratio is identical, the question posed was this: will consumers evaluate these two programmes differently?

Rajesh Bagchi Rajesh Bagchi studied the magnitude of steps in loyalty programme rewards, and how the 'reward per dollar' influences the consumer's perception of their progress within the programme.

Although both programmes offer the same US$6 discount for the same US$100 spending requirement, these two reward structures caused strikingly different responses from consumers, according to Bagchi.

"Since American Airlines pioneered its frequent flyer programme 28 years ago, rewards or loyalty programmes have grown in popularity," said Bagchi. "But despite their importance to businesses, little is known about how different facets of a loyalty programme affect consumer perceptions of the programme after they sign up. In other words, membership does not guarantee loyalty."

Recent studies such as those conducted by US-based loyalty journal Colloquy suggest that there are currently some 1.3 billion loyalty programme memberships in the US alone, while less than one quarter of enrolled members actually redeem their rewards.

According to Bagchi, while many companies make occasional changes to their loyalty programmes, they may not fully understand the effects of those changes on their customers. For example, a number of credit card providers offer reward points that vary in number according to category of each purchase (e.g. 2% for purchases from the card's co-branding merchant, versus 1% for purchases from all other merchants). At the same time, performance-based membership tiers often create differences in the value of the rewards and benefits available to members. "All these factors may influence consumer perceptions of progress toward the reward, and these in turn can affect their loyalty," warned Bagchi.

Loyalty programmes comprise two key elements, the study found. The first is simply 'points earned per US$1' - which Bagchi and Li call "step size" - and the 'total points needed to redeem a reward' - which is termed the "reward distance".

The authors examined whether or not consumers always integrate both of these elements in their assessment of loyalty programmes, and tried to determine what is role, if any, is played by the overall "magnitude" of the programme. (A higher magnitude programme has large reward distances and large step sizes; a lower magnitude programme has small reward distances and step sizes.)

Bagchi noted: "We've introduced the concept of step sizes, and show that small step sizes can make even a small distance appear large. How fast the rewards seem to pile up in consumers' minds depends on whether they focus on the reward distance or the step size, or consider both at the same time."

When the step size is not precisely presented as a straight-forward rate (e.g. 1 point per US$1) but as a more complicated range of points (e.g. from 7 to 13 points, depending on the product purchased), the study shows that most consumers tend to focus on reward distance alone.

"However, in a higher magnitude programme, the reward distance somehow feels very large to consumers, so that those close to getting the reward - those with 800 of the 1,000 required points, for example - feel that they have made much more progress than those with only 200 points," said Bagchi. "But, in a lower magnitude programme, consumers feel that the reward distance is small and that there is little difference between 80 and 20 points, so that those closer to the reward do not feel that they have made more progress than those who are still further away."

Finally, when the step size is a single and definite rate, consumers integrate step size with reward distance in their thinking, but they do so in a biased way that reflects the human inability to consider more than a small amount of information at a time, Bagchi found. As a result, a large reward distance makes consumers feel that the goal is a long way off. But instead of calculating the redemption costs, they use the step size to form quick impressions.

The full article, entitled 'Illusionary Progress in Loyalty programmes: Magnitudes, Reward Distances, and Step-Size Ambiguity', is to be published in the February 2011 edition of the Journal of Consumer Research.

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