Why do consumer loyalty rewards programs need careful crafting?

Aug 24, 2010

In order to be competitive, companies can go overboard in trying to come up with creative designs for the loyalty reward programs. According to a new study in the Journal of Consumer Research, some of these designs can lead to unintended consequences.

Authors Rajesh Bagchi and Xingbo Li (both Virginia Polytechnic Institute and State University) compared programs where could achieve the same six-percent discount by reaching either 1,000 points or 100 points. In each case, consumers had to spend $100. They found that ways rewards are structured -- the "steps" and the magnitude of the reward system -- elicited strikingly different reactions.

The distances appeared larger in the higher magnitude program, so consumers near the reward (with 800 points) felt that they had made much more progress relative to those farther away (with 200 points), as they had accumulated many more points. But participants who were near the reward in the smaller reward program (with 80 points) did not feel that they made more progress relative to those farther away (with 20 points).

The authors found that, even though the reward was the same in both instances, the magnitude of the program affected consumers' perceptions. "Consumers are cognitive misers and do not do the necessary calculations to assess redemption costs. Instead, they use step-sizes to form impressions," the authors write.

If step-sizes are large, the reward appears attainable as the progress-rate appears high (10 points/dollar). Because of the giant step-sizes, perceptions of those closer to the reward do not differ from those farther away. However, when stepsizes are smaller (1 point/dollar), those close to the reward believe that they have made a lot of progress, given the baby steps, relative to those farther away.

The authors also found that these progress perceptions affected loyalty and the likelihood of recommending a program. They believe their findings could be applied to organizations that wish to create programs that encourage financial savings or weight loss.

Explore further: Non-citizens face harsher sentencing than citizens in US criminal courts

More information: Rajesh Bagchi and Xingbo Li. "Illusionary Progress in Loyalty Programs: Magnitudes, Reward-Distances, and Step-Size Ambiguity." Journal of Consumer Research: February 2011. journals.uchicago.edu/jcr

add to favorites email to friend print save as pdf

Related Stories

Calif. man charged in Net 'click fraud'

Mar 30, 2006

A California man has been charged with using a "click fraud" scheme to chisel the FreeRide Web site out of reward points used to obtain free merchandise.

Brain activity encodes reward magnitude and delay during choice

Jul 09, 2008

Good things may come to those who wait, but research has proven that humans and animals actually prefer an immediate rather than a delayed reward. Now, a study published by Cell Press in the July 10 issue of the journal Neuron reveal ...

Impulsiveness linked to activity in brain's reward center

Dec 20, 2006

A new imaging study shows that our brains react with varying sensitivity to reward and suggests that people most susceptible to impulse -- those who need to buy it, eat it, or have it, now -- show the greatest activity in a r ...

Praise = money?

Apr 23, 2008

Why are we nice to others? One answer provided by social psychologists is because it pays off. A social psychological theory stated that we do something nice to others for a good reputation or social approval just like we ...

How can we measure the emotional states of animals?

May 21, 2008

Rats housed in standard conditions show a stronger response to the loss of an expected food reward than those housed in enriched conditions, perhaps indicating a more negative emotional state, according to new research by ...

Recommended for you

Power can corrupt even the honest

2 hours ago

When appointing a new leader, selectors base their choice on several factors and typically look for leaders with desirable characteristics such as honesty and trustworthiness. However once leaders are in power, can we trust ...

Learning at 10 degrees north

3 hours ago

Secluded beaches, calypso music and the entertaining carnival are often what come to mind when thinking of the islands of Trinidad and Tobago. But Dal Earth Sciences students might first consider Trinidad's ...

How to find the knowns and unknowns in any research

4 hours ago

Have you ever felt overloaded by information? Ever wondered how to make sense of claims and counter-claims about a topic? With so much information out there on many different issues, how is a person new to ...

Minorities energize US consumer market, according to report

4 hours ago

The buying power of minority groups in the U.S. has reached new heights and continues to outpace cumulative inflation, according to the latest Multicultural Economy Report from the Selig Center for Economic Growth at the ...

User comments : 0