How to use rewards to drive incentive and loyalty program success
By Ko de Ruyter, Debbie Keeling and David Cox
So far, we have argued that there is a strategic place for different types of rewards in loyalty programs in parts 1 and 2 of this trilogy on rewards. In this third and final part, we take a more tactical angle and pose the question: ‘How can rewards be used to drive effective loyalty programs?’. Answering this question, we once again turn to member psychology in relation to rewarded behaviour.
During the past decade, as loyalty programs have come to terms with analysing Big Data, it has been consistently observed that members increase their spending after reward redemption for a short period of time. After redeeming points for a reward, there is invariably a short-lived peak in which point accrual follows an upward trajectory.
There are three possible motivational factors for this remarkable phenomenon:
Firstly, program members don’t like losing points and want to get back to their former and comfortable point balance.
Alternatively, it could be argued that receiving a reward reinforces a positive attitude towards the brand which, in turn, drives more spending and reward redemptions.
A third explanation is the phenomenon of satiation. That is, the burst of points redemptions and associated rewarding satisfies member needs for a period of time.
Conversely, after the extra, short term boost in spending, there is likely to be a drop and the pattern will then repeat itself. Thus over time, ebbs and flows in loyalty points build-up can be observed. Generally, these flows correspond to three (latent) motivational states: active, hyperactive, and inactive.
The Motivational Cycle – Active, Hyperactive and Inactive
In a recent study (Danahar et al., 2020, International Journal of Research in Marketing), it was found that
Active state: most of the time, members who are active in your program collect points with the purpose of redeeming them for rewards.
Hyperactive state: in this relatively short state, program members focus on earning extra spending. This is also when they spend most points. Obviously, this hyperactive state yields the potential for a higher program ROI.
Inactive state: typically a brief inactive state follows the hyperactive state in which program members are no longer actively focused on going after points. Hence, reward uptake levels are low.
Transitioning back into activity, members then become gradually engaged in the program again and a virtuous cycle will repeat itself. Apart from being evidenced clearly by the program data, these motivational patterns intuitively make sense, as most of you will realise when reflecting on program membership and reward redemptions over time.
Promoting vouchers and gift cards – when is the best time in the motivational cycle?
After establishing the active, hyperactive, and inactive patterns using four and half years’ worth of individual member data (point accrual and reward redemption), the study found that cash proxy rewards (i.e., vouchers and cards) more easily move members to a motivational state in which they are focused on getting more points.
What does this mean for program management? It signifies that there is a time-window that occurs for every member when it is most effective to promote vouchers and cards to get members into the hyperactive state in which their spending increases (to get those extra points and to redeem these for rewards). Through smartly targeted and well-timed comms, members can be stimulated to enter the hyperactive state, and this has the potential to result in a considerable uplift of points accumulation per individual member. If point accrual is proportional to member expenditure this may result in a corresponding increase in vendor revenues.
Adapt your program comms strategy to target the hyperactive state
Additionally, and with respect to a program’s comms strategy, too often members complain that statements are mailed randomly or too frequently. If program managers are able to guestimate at which state members are in the motivational cycle, mailing these statements at the right movement can actually result in an uplift of revenues (while avoiding annoyance about information overload in the process). Furthermore, and given the relative briefness of the hyperactive state, comms that are promotional in tone and include a call to action (e.g., ‘offer will expire’) are likely to be more effective.
Finally, we concluded that a varied reward offering is key to a diversified reward strategy. That still holds. Using extra-special (‘experience’) rewards such as unique rewards fulfilment and incentive travel, that reaffirm the bond between member and brand is the go-to strategy to get your inactive members to reengage with your program and kick off the next virtuous cycle that will migrate them to those motivational states that are most effective.
