How to structure Loyalty Rewards and Incentives
Consumers expect more every day in exchange for their loyalty.
The problem is many loyalty programs are missing the mark when it comes to personalizing offers, choosing the right customer incentives and communicating value in ways that meet the customers’ needs.
Let’s take a look at how to structure your customer incentives mix for increased loyalty.
In this article, you will learn:
- Why do customer rewards and incentives work?
- What can retailers do to influence shopping behavior through customer incentives?
- What makes customer incentives effective?
- What are the most popular customer incentives among retail customers?
Why do customer rewards and incentives work?
It all starts with a very important question: why do people do the things they do?
Let’s face it, humans are complicated creatures.
The left hemisphere of our brain wants us to make decisions rationally. It tells us to think things through, weigh the pros and cons, take existing evidence into account and come to a conclusion based on facts.
Meanwhile, the right hemisphere pushes back hard. This part of the brain is responsible for emotions, creativity and big-picture thinking, and it pulls us in the opposite direction. Why? Because it is often more fun and feels better.
Still, these two brains are not always at odds.
When you give people something that makes both their logical left brain and their emotional right brain happy, you can directly influence their choices. That is exactly what customer incentives do for human beings: they satisfy both the rational and the emotional sides inside of us.
Now let’s look at the economic side of things. Are people completely rational creatures when it comes to their decisions surrounding consumption?
Obviously the answer is a big fat NO.
Otherwise, what would be the point of the advertising industry? The ad industry has been hitting people with one emotional appeal after another for decades, whether it was about what food to buy, what car to drive or what clothes to wear.
People don’t make all their economic decisions the way they solve math problems.
Still, economists have argued the opposite for years: Up until recently, economists theorized that humans consumed and spent their money in the most rational way possible.
And then, behavioral economics came into the picture.
In particular, Kahneman, Gigerenzer and Tversky won the Nobel prize in economics for their work in human decision making. They claimed that humans don’t really think through every decision from beginning to end, but rather use shortcuts to make decisions.
By 2012, the book Thinking Fast and Slow had sold one million copies.
Kahneman and Tversky claimed in that book that we actually do our decision making in two separate states of mind: Type 1 or “fast” thinking, and Type 2 or “slow” thinking.
As it turns out, most of our activity is Type 1 thinking. We don’t take the time to reason our way through every situation. And even in those times when we do make the switch over to Type 2 thinking, we end up switching back to autopilot Type 1 thinking.
Simply put: because there is too much information and too little time.
In the end, most of our decision making is a combination of emotion and habit.
So… what does any of this mean for you as a retail CMO?
It actually means a lot.
In addition to Kahneman’s Thinking Fast and Slow, Thaler and Sunstein explained that there is no such thing as a “neutral” setting for someone to make a decision. Whether your customer is a cash-strapped 20-something-year-old shopping at the grocery store, or a health-conscious mother buying food for her baby, context is going to play an important role in his or her decision making.
Thaler and Sunstein found that small changes in an environment or experience could completely change people’s habits and choices.
So here comes the ultimate question:
What can retailers do to influence shopping behavior through customer incentives?
The answer? Offer better incentives: more attractive, logical-emotional, differentiating, habit-creating incentives.
Let’s see why:
In 2005, Levitt and Dubner published a book called Freakonomics, which quickly turned into a bestseller.
The book really boils down to one powerful idea:
“People respond to incentives”
We may not realize it, but the vast majority of customers behavior is incentives-driven.
What is an incentive?
Simply put, an incentive is any external factor that influences our behavior in a predictable way. Incentives can be economic, moral or social – and they’re not mutually exclusive.
It’s easy to understand what incentives are, but not so easy to structure and design your customer incentive mix, right?
Let’s look at effective customer incentives:
Effective customer incentives take these 5 elements into account:
To be effective, it is recommended that customer incentives meet a few conditions that overall show they offer value and are favorably perceived by customers.
1. To have cash value
Customers assess the economic value of rewards compared to the expenses incurred to obtain the prize.
2. To offer variety
A wide range of choice regarding the rewards should be offered to program members for it to be more attractive.
3. To be aspirational
An aspirational value of the rewards should exist, so that customers relate emotionally and have the desire to obtain it.
4. To be attainable
Rewards should have value in terms of their relevance or likelihood of being achieved. In other words, customers must perceive that the rewards can be obtained and that the efforts involved are feasible. For example, how many points need to be accumulated before getting a physical reward or discount.
5. To be convenient.
The earn and burn mechanics of the program should be simple enough, because today’s busy customers will take into account the scheme’s ease of use.
What are the 6 most popular customer incentives among retail customers?
Successfully choosing the right rewards mix for your loyalty program is key to deepening the customer relationship.
Reward redemption rates provide a strong indication of how easy your program is to participate in and how attainable and attractive your rewards are. The right rewards mix can motivate members to complete more activities and purchases.
Shockingly, to this day 97% of rewards programs rely on transactional rewards, such as points, discounts, or freebies in exchange for purchases.
Also, only 11% of loyalty programs offer personalized rewards.
Over half of consumers say that saving money is their primary reason for joining loyalty programs, and 88% of shoppers say that cash back and discounts are their preferred reward types. But don’t underestimate the power of VIP experiences, money can’t-buy merchandise, free products and sweepstakes entries.
Obviously retailers are missing out on a huge opportunity around creativity and innovation in their loyalty programs, which would result in a much wanted differentiation factor from their competition.
In the last few years, the impact of customer loyalty in a retailer’s performance has been widely acknowledged. It is known that there is a positive relationship between customer loyalty and profitability. Retailers try to build long lasting relationships with customers as the feelings of attachment leads to higher profits.
If you’re a retailer and you’d like to talk about any of the ideas outlined in this article in more detail, get in touch with one of our team – we’ll be happy to show you examples or talk through your brand’s unique challenges.