May 29, 2013

How to Turn New Customers into Repeat Customers (Secrets of Sticky Loyalty Programs)

How to Turn New Customers into Repeat Customers (Secrets of Sticky Loyalty Programs)

Customer loyalty programs can be a gift and a curse.

When done well, they can keep customers coming back for repeat purchases, potentially turning a passerby customer into a loyal brand advocate.


When done wrong, however, they can be a huge waste of time and resources, becoming a tiresome burden for customers who have no interest in getting involved with the program.


But we know that everybody loves free stuff, so how can we get these loyalty programs to be perceived as valuable to customers?


It’s simple:
In the race to win the loyal customer, you should give them a head start.

Creating Customer Loyalty Programs that Stick

What if I told you that an academic study has broken the secrets to successful customer loyalty programs WIDE open, revealing a stupidly simple technique for improving customer retention, loyalty and churn rates over the long haul?


You’d be interested in hearing about it, right?

Well, keep reading...


A breakthrough piece of consumer research by professors Joseph Nunes and Xavier Dreze entitled “The Endowed Progress Effect” analyzes how artificial advancement affects customer effort when it comes to loyalty programs.


Nunes and Dreze began their study with the assumption that customer loyalty programs could persuade customers to stick around—if customers were given a comparative head start in reaching their “payoff milestones.”


In their first study, the researchers gave 300 loyalty cards to customers at a local car wash. All of the customers were told that each time they returned to have their car washed they would be given a stamp on their card.

A clear incentive was laid out for those that got their car washed regularly; upon the completion of their card, they would receive a free car wash.


In truth, two different types of cards were handed out to customers.


  1. The first group received a loyalty card that had eight slots to be stamped before a free car wash was awarded.

    Car Wash Loyalty Card - Version 1
  2. The second group received a loyalty card that had 10 slots to be stamped, but this time two of the stamps were already filled out, meaning customers only needed eight more purchases to get their free car wash.

    Car Wash Loyalty Card - Version 2

With such a similar setup, one might expect very similar results. However, that definitely wasn't the case: The second group had a nearly double rate of loyalty card completion!

Only 19 percent of customers in the eight-stamp group (the first group) made enough visits to complete their card. However, 34 percent of the 10-stamp group (the ones given a head start) came back enough times to finish their loyalty cards.


Why Did This Happen?


At first glance, the results don’t seem very logical. Since the first group had eight slots to complete and the second group had 10 slots to complete (but with a two-slot head start), both groups needed eight purchases before they could get a free car wash.


So why weren’t the results the same?

According to Nunes and Dreze, the head-start loyalty card helped customers mentally reframe the completion process; the fact that they didn't have to start something from scratch played a huge role in their motivation to complete the card.

The researchers also highlighted other studies in their paper that emphasize the finding that the closer people get to completing a goal, the more effort they exert toward achieving that goal.

So even artificial progress has an impact on consumer motivation because it gives customers the feeling that they have already surpassed the most challenging aspect—getting started.


Both cards in this car wash program required the same amount of effort by customers. But the mental block of getting started was eliminated in the second card, leaving more customers able to complete it.


How to Improve Loyalty to Your Business

This research is useful information to know, but how can we go about putting it into practice?

Largely, the creation of a successful loyalty program boils down to three important steps:

  1. Setting a goal for customers to achieve
  2. Deciding what the action will be to progress
  3. Pitching the artificial advancement as a bonus

Let’s take a closer look at how to complete these steps.

Step #1 — Set a Clear Goal

To take advantage of “artificial advancement,” there must be a clear-cut goal that customers can look forward to and it has to align with a desire of theirs.


Without a finish line (or multiple finish lines) for customers to cross, they will lose interest. For instance, the car wash study had “a free car wash” as the end-goal for those involved; that was the reward they would be receiving. I’ve seen many subscription services instead offer price discounts or an upgraded account (such as additional storage or more features) to serve as a desirable goal.

Utilizing your own product as a reward for achieving the stated goal is almost always the right path here. It allows you to avoid losing your shirt from too many expenses. Also, presenting your product as a reward is the perfect way to create enticement, the same way a free car wash (in that example, the product) serves as the reward above.


Step #2 — Decide What Customers Should Do to Progress

You should know from our recent article on gamification that we feel this is the step many companies have the potential to get very wrong.

You have to be careful about choosing which behavior you want to reward.

Purchasing more items makes perfect sense for progression and applies widely to many industries, but when some online companies try to force product use as the action they end up creating misaligned motivations with their customers.


To continue with our carwash example, the ‘action’ customers are taking is simply the purchase of an individual car wash. If your product is subscription based, you can get more creative and have a new customer referral be the end-goal, such as how Dropbox rewards their users via their refer a friend program.

This doesn’t hinder their usage of the product and encourages them to promote it to be rewarded, a win-win for both the customer and the business.


Step #3 — Pitch the Advancement as a Bonus

Don’t skip this step!

Dreze and Nunes found that artificial advancement only had a noticeable effect when there was a clear reason why people were receiving advancement at all.


In other words, artificial advancement won’t work as a tactic if you just hand out points for no reason.


But the reason can be quite simple. For example, you could position advancement as a reward for new signups. This works for every customer loyalty program, regardless of the industry. So when new users sign up, a simple message explaining that you’re giving them some bonus points to help get them started is all you need to justify the process.


No matter what you choose to do for advancement, make sure the reason for the bonus is clear. People won’t be swayed by artificial advancement if they don’t know why they’ve received the extra boost forward.


The Role of “Ego” in Loyalty Programs

Nunes has done some other interesting studies on customer loyalty. In fact, he discovered that in many instances the reward could be worth nothing and still create the same effect!


According to Nunes, consumers get excited about amassing points—even if the points have no currency value. To reinforce his findings, Nunes looks to points systems on sites like Yahoo Answers and Reddit:

You can't exchange these points for real-world goods and services, yet people still spend enormous amounts of time accumulating them just to beat others in a list of top point-getters, or simply to compete with themselves.”

In other words, it’s the competition and the feeling of superiority that is driving the success of many loyalty programs, especially when they aren’t offering a tangible reward.


While this method may work for a social site like Reddit (where the use of the site is the reward, because it’s entertaining), how does this apply to small businesses?


Nunes says that loyalty programs “need to be designed to offer differentiated products and services to customers based on their purchasing patterns and profitability.”

That means most loyalty programs benefit from having different classes.


You’ve likely seen these classes before: “Gold” members get better deals than the “Silver” class. We are wired to want to maintain our status when we know that we are beating other users. The data from Nunes’ study shows that these premium classes can and do encourage people to spend more.

So if you do decide to implement a long-standing customer loyalty program, be sure to consider your “Platinum” users and how you might differentiate their program to reward their ideal spending on your business!


What’s Your Opinion?


Whether you have ample experience with loyalty programs or are new to this business idea, we want to hear from you!


What did you think of the research in this study? Are there any loyalty programs that hooked you into completing them? What did you like about them?

Let your voice be heard by leaving a comment below, and thanks for reading!

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Written by Gregory Ciotti Greg ciotti

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23 Comments

Dawn Marcotte May 29

Great article as usual. Now I just have to figure out how to make this work for my website.

Shayne Yeats May 30

I think It's a smart call to action approach to program consumer's unconscious (or subconscious) and make them do what you wanted.

Tom Howlett May 30

Really good info - I would like to see more examples of this in practise, however I vaguely remember a very similar situation to the car wash example but this was in a coffee shop. It was definitely based on the same principle - anyone know?

KristyleC May 30

Thank you for the great article Gregory! I love the information that you provided in regards to the loyalty stamps for the car wash. It is amazing how a little nudge can bring the customer back to your product or business. Personally, I think I would be more inclined to come back to the business as well. Thanks again!

Gregory Ciotti Jun 3

@Kristyle — My pleasure!

@Tom — Hmm, can't say I've heard of that one, but it was on a loyalty program for a coffee shop you say?

@Shayne — Very true.

@Dawn — Let me know if I can help at all!

Jeet Palavwala Jun 12

Very well written. The car wash example is really great.

Michelle Di Angelo Jun 15

Great article

Jessalyn Teoh Jun 18

Interesting article! The car wash example is very smart. Another example would be the 20X more optimom points for shopping over 50CAD at Shoppers. My friend has been talking about it for a week and it definitely is something my friend's thinking of doing this weekend. Check out this article: http://su.pr/2v5Oyr You will be surprised to find out how many Canadians love loyalty programs.

Eduardo Beracha Jul 3

Great Article! Very interesting!
Please check out our new company and please provide some feedback!

We created a very easy to use web based tool, designed to allow small merchants to create loyalty programs and coupons in just minutes!. All digital! No paper involved!

I would really appreciate your feedback!

Thanks!

Edu

md abdul kuddus Jul 9

i want my wap site download system

arinze micheal Jul 19

guy hw far nw am on gmail

Omnicore Aug 14

Gregory you are killing it really by producing awesome content and it makes me come back to your blog every time. Keep up the good work.

Greg Fowler Aug 15

So I like the concept here, seems to be good insight for a frequent purchase business. Now for a loyalty program that correlates to an infrequent purchase.. say 3-4 visits a year, what would be the mantra here? How can the design be different to influence people to jump on a loyalty program that is not a frequent purchase?

Noah Henry Aug 30

Take an example from these. The 10 Best Customer Loyalty Programs: http://blog.promotionalcodes.com/article/10-Best-Customer-Loyalty-Programs/28

maha Mahgoub Sep 1

i need the contact of Gregory Clotti for inviting him for a conference in Gulf Area in OCt. 2013, my contact email is mmahgub@cdo-eg.com
Tel. 0021001580050

Jessica Sep 4

Thank you for sharing this article. I absolutely identified with the heard start concept in regards to the reward card. I've actually given into this tactic before at my local coffee shop.

Another aspect of this article I loved was the in regards to the "ego" and how to utilize the ego in a customer loyalty program. It is so true that gaining points, whether or not we can use them to purchase real-world items makes us feel good. That feel good mentality is what keeps us around.

Thanks again!

Dan Jones Sep 14

How about a loyalty program that gives back cash not points or pickles. Also one thats good everywhere you want to shop, locally, online, big stores, little stores, my store, your store. One card that allows me to get cash back as i pump my gas, eat my lunch, and book my next vacation. You might ask where's the loyalty! The loyalty is that a portion of the rewards is locked into the card holders loyalty account and can only be used at participating merchants. I can go on forever about this amazing program. For more info cashback2u@outlook.com

Dan Jones Sep 14

Sorry I meant to leave a video link here it is.
http://www.lyoness.net/us/wie-...

Dan Jones Sep 14

You'll love it if I can ever get you there.
"click on my name" if not cut and paste from below..
http://www.lyoness.net/us/wie-funktioniert-lyoness.aspx#tab-1

Tiffany Thompson Oct 23

Who are the companies that help brands launch loyalty programs? I am looking for a company to do the logistics of approaching partners to be apart of our rewards program. Who are these people?

Anthony Cannonier Jan 29

Thank you for this article it was the first site visited on this topic. I co-own a performance entertainment company that offers unique cultural customized performances and workshops, in developing a new pricing strategy the thought of adding a loyalty program came about. You have taken me one step closer.

Kim Jan 30

An additional tip for business owners: create a mailinglist for your loyalty program customers.

Of course, kindly ask them if they wish to be on the list in the first place.

There's nothing like a nice newsletter to remind them what's new in store.

ley Feb 20

very helpful article, thank you!
but could you be more specific on "misaligned motivations"? i really need to get more scoop on it but can't find it so far

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