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Rewards Programs Myths and Truths

By Walter Blotkamp, VP – Client Relationships

Over the past few years particularly, and since our inception generally, MMR has conducted numerous studies on customer rewards in retail, hospitality/dining, banking, and travel.  Our work has ranged from rewards program “newbies” to programs that are fully-established and include the highest tier of rewards offered. While we cannot divulge results of any particular study, we have realized some generalized learnings that are relevant for anyone developing or refining a rewards program.

#1

MYTH:  Rewards programs can rely exclusively on Behavioral Redemption rates to decide what items to keep/offer. 

TRUTH:  Not all “valued” items are frequently chosen.

While people do “vote with” their redemption dollars, just because an individual has never chosen a particular redemption option does NOT mean they place no value on it.  Rather, we have found that the existence of other choices enhances program value even if these options are never chosen. An offering such as a charitable donation might be used infrequently but customers feel better about the program overall when such offerings exist.  Placing value on non-selected items is particularly true for people who someday might want to gift points/awards to others.  Therefore, streamlining for cost savings based purely on behavioral redemption is not recommended.

#2

MYTH:  Customers “understand” that limits on rewards, like expiration of rewards, are necessary.

TRUTH:  Rewards expiration is very frustrating and threatens retention.

Consumers do understand some types of restrictions. For example, blackout dates for travel redemption are frustrating to consumers, but there is grudging understanding that holiday travel, or travel to a city hosting a special annual event, is a candidate for blackouts.  However, consumers do NOT understand the need for rewards expirations, even if they have an understanding of the economic purpose of expirations. They regard rewards earned like deposits into a checking account – once earned the balance should remain until used. Therefore, try to avoid expiration if at all possible.  Ensure and communicate a simple way for customers to extend expiration dates if you have them.

#3

MYTH:  Since many customers don’t sign up to earn points from partner companies, they must not value such program elements.  

TRUTH:  Customers want simplicity and shy away from complexity, even if they value the reward.

We have found that customers do value the ability to earn – and redeem – through multiple programs, but they value simplicity most of all. Customers will “satisfice” or simplify – and if earning additional points is in any way complicated they will shy away from it. While this behavior might actually have short-term economic value to the company, dissonance is generally not a good long-term strategy particularly if competitors make it easier to earn points across programs. Also, the strong correlation between higher achieved tiers and partner company use suggests that there could be a communications issue: those at lower tiers, who are less engaged, might either not be aware of the partner features or be confused about how to take advantage of them.  Therefore, keep participation streamlined and easy to understand.

#4

MYTH:  Consumers accept and believe that ALL rewards should be “earned.”  

TRUTH:  A quick earn is a quick win for the company.  

A sign up bonus is highly valued. Partial redemption schemes can help foster getting a reward quicker if the full reward would indeed take some time to achieve. Offering “surprise” rewards along the way such as member sales/discounts, special achievement programs/earnings bonuses, or special event access help generate early involvement and commitment.  Customers want to have an initial reward delivered quickly rather than have to wait for many multiple purchases to gain any reward.

#5

MYTH:  Tiers motivate achievement to the next level and Higher Tier Customers are more “loyal.”

TRUTH:  Tier achievement is often a matter of circumstance as opposed to a sign of loyalty.

This finding might be a bit more controversial. While the fundraising and philanthropy industries have clearly identified that differential benefits at various donation levels will increase donation levels, the same cannot be said of corporate customer rewards programs. There are certainly exceptions, but by and large people cannot fly more, dine out more, or go to the store more frequently, to push themselves into a higher tier. This is why progress bars to the next level are not seen to be as motivating as, say, with video game level progression or fitness monitoring toward a goal. In fact, constantly being reminded of a higher tier that is not in someone’s reach tends to create resentment. Lower tier membership does not necessarily denote less loyalty.  Thus, companies should be very careful about how they communicate tiers.

#6

MYTH:  Consumers evaluate rewards based solely on their economic value.

TRUTH:  Presentation matters; Economic equivalence does not mean equal perceived value.  

We have run many choice studies on various rewards programs and almost invariably find that HOW a feature or element is presented greatly impacts perceived value. We know from behavioral economics that seemingly “irrational” behavior can in fact be predicted – sometimes with understanding of an underlying cause and sometimes without. While some customers are fully rational in their rewards program choices, most are not. Companies can put economically equivalent items into choice studies for program features – they are rarely redundant. Work to gain a strong understanding of what will and will not motivate redemption and earnings.

 

At MMR, we have found that successful rewards programs share some elements across programs while maintaining a distinctive style. We continue to uncover or verify truths and dispel myths through customer voice research as well as benefits optimization studies, leading to better program management for our clients.

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