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ChangingMinds Blog! > Blog Archive > 26-Jun-06

Monday 26-June-06

Loyalty traps

Joseph C. Nunes and Xavier Dreze, professors in the University of California Marshall School of Business in Los Angeles and the University of Pennsylvania's Wharton Business School, respectively, did an interesting experiment with a car wash business as a part of their study of loyalty programs.

They ran two very similar programs together and examined the difference in behavior that they engendered. In one program, they gave away stampable cards that gave free wash after 8 visits. Thus, every time you have a car wash you get your card stamped, and after eight, you get the ninth free. In the second program, they gave exactly the same economic benefit, but now offered stampable cards that gave a free wash after 10 visits, but with two 'free'
stamps thrown in (as a 'special'). Guess what? In the first program, customers averaged 8 visits in 16 days. But in the second program, where they had two 'free' stamps to get them going customers got to their eighth visit in just 13 days, giving the car wash a distinct economic benefit at no extra cost from this variation. They called this the 'endowed progress effect'.

Another thing that they found was that the time and effort taken to gain rewards was important. Too easy and they would not value it as highly. Too difficult and they would quickly give up. For example, they found that a grocery store that offered a $50 reward for every $500 spent led to greater loyalty than either a $10 reward for every $100 spent or a $100 reward for every $1000 spent.

There was also a June 2006 Harvard Business Review article by them, in which they suggested that loyalty programs, done right, can offer five benefits:

1. Keeping customer from defecting, for example by by creating barriers to exit.
2. Winning greater share of wallet, for example by giving customer reason to buy more from one place, such as by giving disproportionately greater benefits as they pass spending threshholds.
3. Prompt customers to make additional purchases, for example to get to 'gold' level service.
4. Yield insight into customer behaviour, so you can use behavioural information gained to target promotions.
5. Turn a profit, such as American Airlines selling AAdvantage air miles to other retailers.

Here's a news release about them: http://www.usc.edu/uscnews/news_releases/detail.php?id=113

More details here: http://harvardbusinessonline.hbsp.harvard.edu/b02/en/common/item_detail.jhtml?id=4095