Consumer Psychologist Examines Effectiveness Of Reward Programs

(PhysOrg.com) -- Rewards programs. Everyone is doing them — airlines, casinos, airlines, hotels and grocery chains — all with the intent to build customer loyalty.  Everybody has one, and nobody knows what it does for them, according to Ithaca College consumer psychologist Michael McCall.

“The hospitality industry has offered reward programs for almost 30 years. Yet there is still a lack of evidence that demonstrates a direct relationship between the program member and their loyalty,” said McCall, lead author of a recent hospitality paper, “Building Customer Loyalty: Ten Guiding Principles for Designing an Effective Customer Reward Program.”

“Most reward programs are driven by what the competition offers, rather than demonstrated effectiveness. As such they fail to pay attention to customer psychology and desires,” said McCall, a professor of marketing and law at Ithaca College and visiting scholar at the Cornell University School of Hotel Administration.

Most rewards programs are based on tiers, “for example, the Marriott program offers silver status, which says stay 10 nights and get the 11th night free. The customer achieves gold status after 49 nights and gets the 50th night free. I would argue that the person who gets the 11th night free but is not likely to make 49 nights might then switch to Hilton for their perks, whereas the 49 nighter would probably pay for the 50th night anyway. The hotel might consider offering different rewards to this member, such as free services for which they normally charge, for example, fitness centers. The 11 nighter and 49 nighter are very different customers, yet they get the same rewards. So the question becomes how do you structure a rewards program that actually has value to the member?”

All customers are not equally profitable, according to McCall. He cites the person who might only fly to London once a year but does so first-class. “This is a much more profitable customer than one who flies to Atlanta on every cheap flight deal.”

In considering the profitable customer, McCall suggests that retailers look at the total revenue customers spend. At a casino someone might not gamble much yet spend a lot of money on the gift shop, golf and in the spa. If the casino only looks at gaming revenue then they miss rewarding a profitable customer.

McCall suggests designing a program that avoids giving rewards that the customer would purchase anyway. He noted coffee programs that give you your 10th cup free. “I am going to buy that 10th cup anyway so the fact that I get it free is nice but all you are doing is giving me 10% of your product free. That’s great for the consumer, but for the retailer that may not be so smart. There may be other rewards you can give that don’t cut into a purchase I would make anyway.”

After reviewing recent research that attempted to deconstruct the factors underlying a successful loyalty program, McCall cites three categories as the main drivers: the structure of a loyalty program, the structure of the rewards, and the customer fit with the loyalty program.

“Reward programs mine lots of data that nobody knows what to do with. This is where people who are statisticians and large-scale database managers are going to be really valuable because we have all this data. For example, grocery stores know what time of day you shop, how often you shop and how often you replace products. While this information looks good on the balance sheet, retailers are paying for data with rewards, but they are not using the data effectively.”

McCall intends to continue researching loyalty rewards programs for the next several years. “It will be an ideal marriage if the practitioners and academics work together,” added McCall.

For a free download of the report, “Building Customer Loyalty: Ten Guiding Principles for Designing an Effective Customer Reward Program,” go to bit.ly/b70H5j and sign in.