Seems a funny thing to say, I mean, how can you use them wrong. You pick a number, say 8, or 10, put that many icons on there, and each time the client comes in you mark it off. It rewards frequent customers and encourages others to become frequent customers. How can there be a right and wrong to that?
There are five simple strategies you can implement with loyalty cards in any industry that will double their effectiveness.
These strategies aren’t based on hear say, but were uncovered through the rigorous scientific study of a pair of social scientists. In 2006 Professors Joseph Nunes and Xavier Dreze published a study on consumer behavior titled The Endowed Progress Effect: How Artificial Advancement Increases Effort. They conducted three studies on the effect of loyalty programs and identified what aspects and features made loyalty programs them more effective. I’ll out line each study and the findings, though the original text is linked above.
Study 1 : Car Wash – Value of Perceived Progress
The goal behind this study was to find if an increase in the perceived progress toward a benefit influenced consumer behavior. This test was conducted at a car wash using 300 randomly distributed loyalty cards.
The first card showed 8 icons. When the customer returned 8 times and got their card stamped, the ninth wash would be for free. The second card showed 10 icons. However when this card was handed out, 2 of the icons were already stamped, or 20% progress. Consumers were told that the bonus was because of a special promotion being run that day. So in each case the number of return visits required to qualify for a free wash was the same.The difference was in the perceived progress toward the benefit, though there was no difference in the actual value.
The difference in the response rate was massive. The first card had a 19% response rate, while the second card had a 34% response rate. Almost double! Even though each card had the same dollar value, the perceived progress encouraged more consumer to stick with the program and return to car wash. This is a very powerful result, but the following studies showed that this isn’t the end of the story, and it doesn’t necessarily work on it’s own.
Study 2: Restaurant – Percentage of Perceived Progress
The aim of this study was to find if the percentage of the perceived progress toward a benefit would change consumer behavior.
They conducted this test with 146 university business students. Participants were told that a local restaurant was starting a loyalty program. Because it was a new program for the restaurant, people who signed up were given bonus loyalty points.
The first group was told they were being given 2 bonus points, with their bonus free meal awarded after 12 purchases. This meant that their 2 bonus points put them 17% towards completion . The second group was told they were being given 5 bonus points, with their bonus at 15. So the second group started at 33% towards completion. The students were then asked to rate how likely they would be to sign up for the program.
It was found that there was a slightly higher attraction to the 33% completion, but the consumers felt that this was a one time offer, and so the higher number of purchases required to reach the benefit was a turn off in the long term.
We can draw two conclusions from this result. Firstly that the percentage of perceived progress provided by the bonus does not influence behavior. Secondly the number of required purchases before the bonus is awarded, does influence behavior. An interesting side note at this study, was that the consumer will recognize the bonus points as a one time special. Even if you intend on always giving a bonus when you hand out the card, the consumer doesn’t know that, so if the number of required purchases is perceived to be too high, it will blunt the effectiveness of the offer. The importance of this becomes clearer in the next study.
Study 3: Liquor Store – Recording Progress
In this study they were trying to find how best to frame the offer and how resistant to gimmicks consumers are. They interviewed 240 visitors to a local liquor store. These people were previous customers to the store, and were asked to participate in a study as they entered the store.
The first group was told that if they made 10 purchases of wine bottles over $10 each, that they would receive a free bottle worth $20.
The second group was told that for each bottle over $10 they purchased, that they would receive 10 points, and when they accumulated 100 points, they could redeem their points for a bottle worth $20.
Both groups were made the same offer, but the framing was slightly different. One group was offered something for free, while the other group was offered a new currency and goods they can buy with it.
Each of these two groups were further broken down into 4 sub groups, based around the bonus points, and how the bonus was framed.
The four groups were
(1) No reason for receiving bonus points,
(2) Specious reason for receiving bonus points,
(3) Realistic reason for receiving bonus points,
(4) No bonus points.
Participants were asked to rate on a scale of 1 to 7 how attractive they found the offer.
This study revealed some very subtle findings.
Consumers that were given a reason for the bonus were much more attracted to the offer, and surprisingly, the spurious reason was more effective than the realistic reason. While consumers that were not given a reason for the bonus were no more attracted to the offer than consumers who were given no bonus. So if you are going to give consumers a bonus, and you don’t mention it, you might as well not bother. This finding is completely against the first study that suggested simply giving consumers a bonus is enough. This study showed that a bonus alone is not enough. the bonus with any reason was significantly more attractive.
A specious reason was more effective than a realistic reason. In the study the specious reason used was “because you are here today the store will credit you with bonus points”.
I can read two reasons why this reason was more effective, there is a hint of scarcity, perhaps the offer is only for today, and I also read a hint of personal connection between the vendor and the customer. The customer is recognized as a person who is present rather than the recipient of policy.
The big finding here was that the Point System was much more effective than the Purchase System. In every sub group, the Point System out performed the Purchase System. Consumer behavior is more influenced by accumulating points that can be spent, than recording the number of purchases before qualifying for something free. It is a subtle difference in framing, but a powerful one.
Applying this to the real world
Applying all of this and making it relevant to your business is the challenge. I’ve tried to do some of the leg work for you and have listed a few simple things you can do to get the most out of your loyalty cards and loyalty program.
- Number of Purchases To Qualify
The fewer purchases are required to qualify for the benefit, the more attractive and powerful the offer is. A loyalty program is ultimately a discount across a given number of purchases. Using a coffee shop as an example, say your offer is buy nine coffees and get your tenth coffee free, or put another way buy 10 coffees for the price of 9. This is the equivalent of a 10% discount. But not every card handed out results in a free tenth coffee. To work out the real cost, lets assume the offer is very effective, and 30% of the coffee cards you hand out are redeemed. Now assume that you make 100 sales, 30% of these sales are the result of the loyalty card, and that amounts to a 10% discount on 30% of sales, which is 3%. Meaning that a 10% discount offer(buy nine get one free), will amount to a real world 3% discount on total sales. To make that even easier, you can work out the actual discount with the following formula
1/(Purchases Required) X 30(Response Rate) = Discount on Total Sales
1/6 X 30 = 5% Discount on Total Sales
1/8 X 30 = 3.75% Discount on Total Sales
1/10 X 30 = 3% Discount on Total Sales
1/12 X 30 = 2.5% Discount on Total Sales
Hopefully those examples can help you decide on what level of discount you can offer on whatever product you are selling. The goal is to make the number of required purchases as low as possible, without sacrificing too much profit.
Discounts on sale prices come straight off the bottom line and out of the business owners profits. With your loyalty program in place, increasing the frequency of purchases, you need to increase your upselling to increase the amount of each purchase. You can do that by offering your equivalent of a bigger cup of coffee, or an extra purchase like your equivalent of a muffin. Some business people I’ve spoken to aren’t comfortable with upselling, and rebel at the classic “would you like fires with that”. But if you offer something that will enhance your customers experience, well being, or value for money, then upselling allows you to create a win win situation. The customer gets a superior experience, and the business makes more money.
- Use Points Not Purchases
Design your loyalty system to be presented in a point system, not a purchase system. This is all about framing and can be done at the artwork stage. In the case of a handed out card, rather than the classic icons, use numbers. Then in the bonus panel, rather than “free” use words like redeem, buy, exchange. The transaction for the reward isn’t something free, they are purchasing your goods with their monopoly money, and that is how you need to frame it. In the case of hand out cards, instead of using little icons, use numbers, or even better, leave the panels empty, and use a stamp that marks the numbers on. So you have a stamp that prints “$10”, and you mark the card with that. It will further accentuate the perceived worth of the card because it is collecting marks, rather than crossing off marks. That wasn’t done in the study, but is my intuition on it.
- Perceived Progress
When you hand out a fresh loyalty card, stamp it, punch it, mark, whatever you do, do it twice that first time. Not once, do it twice. Give the the consumer a perception of progress. If you work out you need 5 purchases for them to qualify, setup your artwork to have 6 icons, so when you mark off that extra icon at the start, they still need to get 5 purchases to qualify. The percentage of perceived progress does not matter, so adding an extra required purchase to the artwork does not make the offer less attractive, so long as you mark it off at the start. THough I will qualify that and remind you that you want the offer present as few “required purchases” as possible. Just add one extra, it is enough, adding more will weaken your offer. Remember it is about perceived progress, not actual progress.
- Lampshade it!
This the final and most important step. When you give them that card for the first time, and you give them the extra stamp, it is critical that you give them a reason. If you neglect this final step, then the whole strategy to improve effectiveness will be diminished, even if you do use a Point System. Script a simple reason that you can use any day or time of the week. The simpler the reason the better. The study used, “we are running a promotion today” and “because you are here today”, something along those lines is the most effective. But you must give them a reason for why they are getting bonus points. The study used it’s staff to vocalize the reason, though you could also consider strut cards, counter cards, stickers or posters to further promote your bonus campaign.
That’s 5 little tricks that will increase the effectiveness of your loyalty cards when compared to the common strategy of putting icons on a card handing them out and hoping for the best. I used the term triple based on the base line response rate of 19% from the first study. Using the results from the three studies, it seems reasonable to expect that if you do everything right you will increase the response rate to around 40%, which is more that double the base line. All it requires is a bit of fore thought in how you approach the promotion and how you present it to your consumers.