Loyalty cards are a complicated business. The last time someone tried to hand you a loyalty card, you probably thought, “I don’t want this, it’s one more thing to carry around in my wallet.” Maybe you said a quick “No thank you,” or politely accepted the hand-off only to find a permanent home for it in the nearest waste basket.
Probe deeper, and it turns out that two primary behavioral barriers present the biggest obstacles to running successful loyalty campaigns:
- Most people don’t keep discount cards.
- Most people don’t redeem discount offers.
It also turns out that this classic and time-honored marketing tactic provides a perfect canvas for exploring the hidden forces that shape our decisions.
The Endowment Effect
In behavioral terms, the endowment effect is the principle that we value something more when it’s ours than we do when that same thing could be ours. The psychological basis for this effect comes from “loss aversion” – we experience losses far more significantly than we experience equivalent gains. In terms of framing discounts, research suggests that $100 represents a sort of psychological line-of-demarcation: For transactions more than $100, framing the discount in dollars carries more weight, while expressing the savings as a percentage feels more significant on purchases less than $100 – a $2 discount on a $10 purchase doesn’t feel as substantive as a 20 percent discount.
When the offer requires people to hang on to a physical card, however, the tables turn.
Picture cleaning out your wallet. You come across a discount card for 20 percent off a $10 item. Maybe you keep it, maybe you don’t. What happens, though, when you find a gift card that still has $2 left on it? By comparison, getting rid of the gift card is a lot more painful!
Why? Throwing out a card endowed with percent savings means foregoing a potential future gain. Throwing out a card endowed with value means giving up something that belongs to us.
In other words, it’s a loss. And we hate losing.
Built on the endowment effect is another behavioral economics principle known as endowed progress. Not surprisingly, the more aware we are of our own progress, the more motivated we are to continue toward a goal. What is surprising, however, is when that motivation is based on progress that didn’t ever take place.
Have you ever created an online profile that required you to input a few basic pieces of information, only to arrive at your profile page to find a message that says: “Congratulations, your profile is 35 percent complete!”?
From a rational standpoint, this is comical; your profile is less than one percent complete. But imagine people’s reaction if they arrived to find a message that said: “Congratulations, your profile is less than one percent complete!” Many people would immediately think “Forget this!”
The psychology behind this is simple: Nobody likes to feel like they are starting from the bottom of the mountain. Endow us with a sense of progress toward a goal – no matter how arbitrary – and our motivation to achieve it rises exponentially.
In a classic experiment, researchers used a variation on the “Buy 10, get the 11th free” punch card to illustrate this behavioral principle. In one condition, subjects received “Buy eight car washes to get the ninth free” cards. In the second condition, researchers gave participants “Buy ten car washes to get the eleventh free” cards, but in that condition two of the markers had already been punched.
Psychology aside, the two research conditions were functionally equivalent: both cards required eight purchases to earn a free car wash. And yet, while the first group completed their cards 19 percent of the time, the group that received the endowed progress completed theirs at a rate of 34 percent – equating to an 80 percent increase in completion – and the average time between car washes dropped (improved) by three days.
A Loyalty Solution
While there is no one best way to create discount offers, the design of any effective loyalty program should seek to solve for your customers’ existing behavioral barriers. Want people to hold on to loyalty cards? Try endowing value. Want customers to use the loyalty cards? Try endowing progress.
Whatever you do, start by understanding your consumers’ psychology. In the long run, it can create real loyalty for your brand.
And isn’t that the point of a loyalty program in the first place?