Effort v Reward:
Defining the ‘Effort Advantage Ratio’ is Key to the Success of Loyalty Programs
By Dr David Cox
A term that we commonly use in channel loyalty and incentive programs is the effort advantage ratio. This concept has been adapted by the pioneering work undertaken by Ran Kivetz and Itamar Simonson (2003), where they undertook a study into consumer loyalty programs and looked at the effort a participant must undertake to achieve a loyalty program reward and how this effort impacted on attractiveness of the loyalty program for their continued participation (what they termed the Idiosyncratic Fit Heuristic).
In the past 15 years we have adapted this concept into a ratio that determines the amount of effort that a participant requires to achieve a reward in a channel loyalty program.
7 things to consider when weighing up the Effort Advantage Ratio
The basis of effort advantage ratio is to compute the following 7 attributes (which are weighted to give an overall score). Some attributes have negative weighting and some have positive. The goal should be to achieve at least a positive ratio score (the higher the positive ratio the more attractive and enticing the loyalty program).
- Time it takes a participant to complete the basic point-earning task (measured in minutes)
- Sales cycle (measured in days)
- Steps to register or claim a sale
- Inclusion of earning caps, threshold barriers and tax
- The value of a point and entry-level reward option
- The purchasing power parity in the region
- Hourly wage for the industry or region
These attributes, when combined into an overall ratio score, indicate whether the structure of the loyalty program is too difficult for participants to become engaged.
Interestingly, a very high ratio score may also indicate that a program is too generous in its reward structure and hence a review may be warranted so as to achieve the optimum ROI.
At Motivforce we have seen programs suffer a negative ratio when finance and trust and compliance (TCO) departments start to create additional barriers to engagement, which has produced a negative effort advantage ratio. Initiatives such as limits on redemptions, limits on participants per firm, revenue thresholds that a firm must hit to release program points for their employees, and point earning caps have uniformly lowered the effort advantage ratio and in turn impacted negatively on program ROI.
However the benefit of having an effort advantage ratio in place, which is regularly used to monitor a program’s performance, is that it can provide advanced warning to program managers, sponsors and stakeholders of the likely impact of structural changes.
Hitting the Sweet Spot
The ultimate goal is to achieve an effort advantage ratio that continues to hit the sweet spot in term of maximum engagement, maximum participation, maximum revenue with minimum investment and compliance.