Marketing

Earning the Right to Indulge

TWENTY YEARS AGO American Airlines set the marketing phenomenon of frequency programs on fire with its AAdvantage frequent flyer program. Since then, myriad businesses from supermarkets to toy retailers have latched on to loyalty programs as a way to lure and keep consumers. Not all have succeeded: Chili’s Frequent Diner, for one, never took off. In the last two decades, marketers have realized that a sophisticated understanding of consumer motives and incentives can make or break an effective frequency program.

Business School graduate Ran Kivetz, PhD ’00, and Itamar Simonson, the Sebastian S. Kresge Professor of Marketing, have embarked on a broad research effort to understand why customers join loyalty programs and how they use them. They recently completed a paper that examined how the amount of effort consumers must expend to get a reward—how many miles, points, or purchases they must accumulate—affects the types of rewards they prefer. Kivetz and Simonson found that the more effort required, the more consumer preferences shifted from necessity rewards, such as a grocery or gasoline voucher, to luxury items, such as spa certificates, gourmet dinners, or cruises.

The research is based on surveys of 3,100 consumers. Participants were asked to choose among different rewards or decide whether they would join various frequency programs. All were based on actual programs, including a car rental program, a department store program, and an online shopping scheme. Various participants were offered different program requirements: 10 versus 20 car rentals, $2,500 versus $5,000 in store purchases, or 12 versus 24 online purchases. In all three cases, more consumers chose luxury items when program requirements were high. For example, when the frequent Internet shopper program required only 12 online purchases to receive a reward, 51 percent of the participants chose the luxury item. But among those who were told they had to make 24 online purchases for a reward, 73 percent chose the luxury. “Consumers seem to feel more entitled to luxury goods when they ‘earn’ the right to indulge by exerting effort,” says Kivetz, who is now assistant professor of marketing at Columbia University Graduate School of Business.

In examining the psychology behind their findings, the researchers discovered that guilt about consuming luxury items plays an important role in consumer preference toward rewards. Participants in one survey rated themselves in terms of how guilty they felt about purchasing luxury items in general. The effect of effort on which rewards were chosen was strongest among people who reported the most guilt about purchasing luxuries. It was also stronger among consumers who said their efforts to earn rewards were usually made in the context of work rather than pleasure, such as renting a car for work rather than vacation. “Some people need to justify luxuries,” says Simonson. “They feel guilty, and investing more effort in the program helps them reduce this guilt.”

The researchers also wanted to test the impact of different rewards on the likelihood that consumers would subscribe to a frequency program in the first place. When respondents were shown a car rental program that offered a luxury reward, increasing the program requirements from 10 to 20 car rentals did not influence their reported likelihood of joining the program. However, when a necessity reward was offered, increasing requirements from 10 to 20 car rentals led to a significant drop in the number of consumers who said they would join. Repeated experiments with a variety of loyalty schemes produced similar results.

The research has relevance to the design, targeting, and promotion of frequency programs. “For a low amount of points or requirements, you want to offer relatively more necessity rewards,” says Kivetz. “For higher requirements, you want to increase the relative amount of luxuries in the reward mix.” In addition, “a company could personalize the rewards depending on the members’ individual level of effort,” says Kivetz.

—Barbara Buell

Earning the Right to Indulge: Effort as a Determinant of Customer Preferences Toward Frequency Program Rewards, Ran Kivetz and Itamar Simonson, GSB Research Paper #1688, May 2001