Research profile | The secret to a more effective loyalty program? Keep customers guessing.
Loyalty programs, including rewards such as frequent flier miles or free coffee cards, are designed to change the way consumers purchase items by rewarding them for behaving in a manner desired by a particular business.
But could something as simple as varying the timing of the rewards make a difference?
Assistant Professor Tim Silk - an expert in rebate promotions and consumer-friendly pricing - thinks so. He has been conducting research into the consumer perception of loyalty programs and their impact on consumer behaviours.
All commercial loyalty programs are based on fixed-ratio reward schedules where the ratio of rewards to behaviour is constant. For example, in a coffee shop a customer might buy nine coffees and get the tenth cuppa free. This reward reinforces the type of consumer spending behaviour that is desired by the coffee shop.
Silk's research into the efficacy of fixed-ratio rewards has led to some interesting revelations, the most important being that members of fixed-reward loyalty programs are influenced by temporal perceptions of reward proximity.
In other words, purchasing behaviour speeds up as consumers near their reward (for example, the 10th coffee) but slows down after they achieve the reward. This affect is due to the perceived psychological distance to the next reward.
This constant cycle of speeding up slowing down led Silk to wonder about the efficacy of other types of reward schedules - specifically, variable-ratio reward programs. In these programs the rewards are administered sporadically; a customer could get several rewards in a row or none at all for a span of time.
In order to determine how variable rewards affect purchase behaviour, Silk conducted a study where he grouped participants according to a given reward schedule, either fixed or variable. Participants did not know which group they belonged to, or what the frequency of rewards would be. He then monitored how the reward schedule affected purchasing patterns.
Silk discovered that in the fixed schedule, he never told people when the reward was going to come, but over time they learned that after a certain number of purchases they were rewarded. This knowledge impacted their behaviour appropriately. Purchases sped up as the reward was anticipated and then slowed down after they received it. In the variable schedule, rewards came sporadically, resulting in an increase in purchases as participants had higher expectations of being rewarded.
"The benefit of this research to marketers is significant," notes Silk. "It indicates that purchase behaviour can be modified without increasing marketing budget. Merely changing the timeline and pattern of reward distribution can lead to positive sales returns for a company."
Learn more about Assistant Professor Tim Silk and his latest research interests.