Why Do We Reward Our Customers?

Contributor:  Brian Cantor
Posted:  02/23/2012  12:00:00 AM EST
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Study after study reveals the significant extent to which customers demand rewards for their loyalty, and as a result, business after business has introduced some sort of rewards programs.

While a number of organizations have been able to trace positive business impact to their loyalty and rewards programs, the question of whether most programs are truly achieving their desired objectives remains largely unanswered.  Sure, in a broad sense, providing customers with rewards signals the internal value placed on them by the organization, and that should at least slightly boost satisfaction levels.

But given the many dimensions in which a rewards program can be a powerful customer management tool, should organizations really settle for “slight” satisfaction boosts?

In determining the full extent of benefits a successful rewards program can bring to the corporation, we look at some common, pointed objectives businesses have for such programs.  We also look at some of the shortcomings and complications associated with most efforts to achieve these objectives, thereby raising concerns about whether more than a slim minority of businesses should presently be celebrating the “success” of their rewards and loyalty initiatives.

Objective:  To improve customer satisfaction with existing purchases and incentivize additional purchasing

No matter the nature of the customer rewards program, it should be designed in a way that induces additional purchasing.  Customers should recognize the rewards as incentives to spend more money with the organization, since part of that money will be funneled back in the form of valuable rewards.  Even if the rewards program does nothing to make a customer feel more important, it should be able to succeed on the sensibility grounds:  if the money I spend will be rebated back to me, why would I not buy more stuff?

Limiting the efficacy of this strategy is a frequent failure to align the rewards program with actual customer habits and behavior.  Too often, rewards programs are structured on either ambiguous or organization-motivated grounds that have no legitimate connection to how the brand’s particular customers engage with its particular lines of products.  Customers do not want to view rewards programs entirely as “aspirational”—they want to believe the company is rewarding them for behaving the way they already do.

If customers do not feel “rewarded” for their existing purchasing, they are unlikely to demonstrate the increased satisfaction expected of the loyalty program.  As a result, the business has done nothing to further engage existing customers.

Worse, if the loyalty program’s required “achievements” and resulting rewards do not organically fit into the customer engagement framework, the program is unlikely to properly incentivize purchasing.

What if, for instance, a coffee shop offered a free donut to those who buy ten cups of coffee?  To the extent that a customer purchases a morning coffee no matter what, this type of reward program won’t hurt existing purchasing levels.  But for customers who are dieting, the promise of a free donut is unlikely to cause them to also buy a second daily coffee at 3PM in the hopes of more rapidly reaching the reward threshold.

Similarly, if the same coffee shop created a rewards program that offered a free coffee-donut combo to someone who buys five coffee-donut combos, the dieting customer will not see this as a relevant reward and thus not depart from his existing, coffee-only purchasing habits.

Objective:  To maximize loyalty and create more lucrative relationships with the most valuable customers and segments.

A common strategy within customer management is to work most diligently to appease those customers who bring the most value to the organization; this, in theory, maximizes the ROI of customer engagement initiatives.  If recognition of a customer as important helps maximize that customer’s loyalty to the organization, the organization will naturally structure its rewards program to recognize those customers whose loyalty means the most.

Often overlooked, however, is the difference between the value of a customer and the effort threshold needed to court that customer.  Although it would seem intuitive to devote the most resources towards attracting those customers most likely to spend significant, regular money over the long-term, it is not necessarily case that the marginal returns of such investment are significant.

There is an important distinction between rewarding customers and entitling customers.  It is not uncommon for an especially-loyal, valuable customer to remark, “I spend tons of money with this retailer and will continue to do so because I like their products and their service is decent, but it would be nice if the store went out of its way to notice me.”  While a satisfaction benefit  (and thus a reduction of attrition risk) clearly exists in showering that particular customer with rewards, it appears that the customer’s purchasing habit will not notably be influenced by the extra courtship.

A fringe customer indifferent to the brand, meanwhile, might be more likely to shop at that retailer if the store makes the shopping experience worth his while.  It might seem unfair and certainly unintuitive to prioritize a less valuable, less long-term customer in crafting a rewards experience, but if a goal is to drive value from improved relationships, such prioritization might actually produce a greater ROI.

True, keeping regular, committed customers more happy might help assure they do not cease in their efforts to advocate for the brand, but one can certainly counter that those unexpectedly wowed are even more likely to serve as ambassadors.  Moreover, if a high-value customer feels entitled to the rewards he receives, he would not see the rewards program as going "above and beyond" and thus might not see it as a reason to further advocate on behalf of the brand.

It is never a bad thing to simply focus on making customers happier, and it is certainly important to keep the most valuable customer segments engaged.  But in structuring their rewards programs along those lines, businesses might, in fact, be responding to a desire for entitlement rather than bridging the gap between a customer’s current purchasing level and a greater purchasing level.

Objective:  To gain insights into the customer that can better advise on engagement strategies

As businesses increasingly look at overhauling how they acquire and act on customer data, the rewards program has special relevant in today’s era of customer management.  Rewards cards and loyalty programs provide businesses with front-row access to customer habits, demonstrating how the customers spend their money with the brand and how they respond to particular incentives and stimuli.

But when developing a rewards program for this purpose, organizations must commit themselves to linking the newfound customer insights to greater customer-centricity.

As evidenced by the catch-22 associated with Target’s profiling of pregnant customers, customers want a customized experience and yet have concerns over how businesses go about acquiring the information needed to create those profiles.  Obviously, basing offer profiling only on opt-in survey data would be the easiest means of addressing that catch-22, but insofar as actual customer habits are often more valuable to customer experience designers than potentially-biased, opinion-driven survey data, companies are generally going to want to use rewards cards to build customer profiles.

Businesses who use rewards programs in such a mannermust assure they are actually driving customer experience value from being able to more-accurately speak to individual customer and customer segment profiles.  If they do not do so, they will not achieve the customer buy-in necessary to overcome concerns over data use.

And even if the particular customer is naïve and does not recognize the connection between his rewards card and the “targeted” offers he receives from the brand, what value exists in modeling for, acquiring and analyzing the data if it is not going to be used to create a more lucrative, customer-centric experience?

Brian Cantor Contributor:   Brian Cantor

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