New reports on the appeal of cash-back rewards from the Wall Street Journal and Nielsen lead us to ask the question: Are points and miles passé? Why go to all the trouble of offering a loyalty currency, providing redemption options, and then operationalizing reward fulfilment when you can just stick a few coins back in your customers' pockets and be done with it? Here's a look a the pros and cons of cash back rewards.
By Rick Ferguson
The Wall Street Journal article highlights the growing arms race amongst US credit card issuers in which rewards cards offer increasingly rich cash-back rewards: up to 10 percent in some cases. American Express, which is leading the pack in lucrative cash-back offers in spite of its investment in the points-based Membership Rewards program, is offering promotional rates of 10 percent on Amazon.com purchases and 6 percent on grocery purchases. Top US issuers such as Capital One, Chase, and Citi are also offering lucrative rewards.
We're even seeing issuers revive the "relationship banking" concept of the Oughts as USAA is currently beta-testing offers of cash rewards for basic retail banking transactions such as maintaining a checking account balance, using a debit card, or transfering money into a savings account. All of this cash flowing from reward cards has seen some cardholders earn $1,000 or more annually through careful gamesmanship of their cash-back cards.
The Journal highlights a recent Creditcards.com survey in which nearly 75 percent of consumers surveyed prefer cash rewards to other loyalty rewards - just 16 percent prefer airline miles. Does this trend toward cash rewards mean that points-based reward programs are no longer worth the expense incurred by brands to operate them or the time consumers spend navigating them?
The recent Nielsen Global Retail Loyalty Sentiment Survey, a poll of 30,000 online consumers in 63 countries, likewise reveals that discounts and cash are king when it comes to global reward preferences. Money quote from Nielsen survey:
"When it comes to the most-valued loyalty-program benefits, monetary incentives top the list in every region, by a wide margin. More than half of global loyalty-program participants (51%) say product discounts are among the three most valued benefits, and discounts are particularly popular in Europe (62%). Fewer global program participants (45%) say rebates or cash back are among the most-valued benefits, but cash back is slightly more popular than discounts in North America (49% vs. 46%) and Latin America (48% vs. 47%)."
Here's the one important watch-out from any survey in which consumers are asked to rank loyalty program benefits: in every case when given the choice, consumers will always tell you they prefer the cash. When performing the mental calculations in their heads, consumers will always choose the perceived path of least resistance; "Hmmm," goes the inner monologue, "Mess around with points and redemptions when I can just have the cash in my pocket? The answer is obvious!" And so cash-back and discount rewards will always lead any survey ranking of reward benenits.
The problem with relying too heavily on such survey results is that the "say-do" gap in behavior is historically quite large in loyalty program participation. Consumers say they prefer cash; but their behavior within programs demonstrates time and again that currency-based programs are more effective in driving behavior change within the program. In other words, your customers will take the cash, but they won't necessarily give you something in return - cash rewards are often inneffective in encouraging customers to shop more frequently or buy more when they shop.
If, on the other hand, a customer is a few thousand points away from earning a free trip, then they often will change behavior in order to earn the reward. This result is grounded in basic human psychology; copious research studies have shown that it is the anticipation of earning the reward that changes behavior - not the reward itself. There is a lesser sense of anticipation in earning cash-back; customers often simply accept and then spend cash, often on utilitarian items with little emotional appeal.
Money quote from Barry Kirk, VP Loyalty at Maritz Motivation Solutions, quoted in the Journal: "The whole idea of a reward is loyalty, but it is very difficult to create a memory or emotional attachment around cash."*
Consumers like cash-back rewards, which is why cash-back reward cards are proliferating. Program operators like cash-back rewards because they're easy to implement, incur no liability, and require minimal reward program infrastructure to deliver. If you're considering cash-back options in your own reward program, however, consider the following watch-outs:
1. Cash-back has limited emotional appeal. Again, customers who say they prefer cash-back rewards do not often attach emotional memories to the earning or spending of cash rewards. Sure, they may save up the cash for a trip or to spend on Christmas presents for the family - but they're just as likely to spend the rewards on gassing up the car.
2. Cash-back makes your funding rate transparent. Part of the reason cash-back rewards have grown so rich is that, absent the more opaque funding rate inherent in curency-based programs, there's no hiding the funding rate in a cash-back program. With no other cards to play, upping the ante by raising the percentage offered is your only available option to increase program value.
3. Cash-back offers no perceived value stretch. The reason why points-based programs offer more elasticity is that you can build in perceived value in your rewards. For example, the incremental cost of delivering a reward flight to a frequent-flyer program member is far less than the perceived value of that free flight to the member. If you're offering 5 percent cash back, on the other hand, then every $100 your cardholder spends earns them $5 back - no more and no less.
None of these watch-outs are to say that cash-back rewards aren't an effective value proposition - card issuers wouldn't be doling out all of that cash if it wasn't moving the needle. That said, there are important considerations to take into account when choosing a loyalty value proposition. Understanding the key differences between cash-back and currency-based programs, and how customers respond to them, will ensure that you offer your customers the right rewards to achieve the behavioral outcomes you desire.
Rick Ferguson is CEO and Editor in Chief of the Wise Marketer Group.
*Full disclosure: Maritz Motivation Solutions is a sponsor of the Wise Marketer Group.