Do you want to have loyal and engaged customers? Give them a loyalty card, a voucher, or any other kind of direct incentive and you will keep them engaged. This is at least what a huge amount of firms in a variety of industries assume, and what drives their marketing strategies. However, some insights from behavioural science challenge this assumption, and suggest that different approaches might be more effective.
In countries like the US the loyalty marketing industry has been estimated as a $6 billion industry (Berman, 2006) and the usage of loyalty programmes is equally popular in other developed countries as the UK and Canada. Nonetheless, despite the significant amount of programmes offer and the large number of members, an important proportion of them has not been successful. There has been found that only about 39% of members are active participants (Ferguson & Hlavinka, 2007) and the awful performance of many of these programmes results in their abolition (Nunes & Dreze, 2006). Therefore, identifying both theoretical and practical insights to increase customer’s engagement remains a challenge.
A behavioural science approach to customer loyalty
A lack of understanding of what drives people’s behaviours could be one of many reasons explaining the failure of a loyalty scheme. In the last few decades, evidence from behavioural science have challenged the idea of the homo economicus proposed in standard economic theories. According to this perspective people are naturally self-interested, utility-maximizers, and able to make perfectly rational decisions. On the contrary, behavioural scientists have argued that people’s decisions are not necessarily “rational” and selfish, but they frequently choose course of actions that clearly reduce their possibilities of maximising their own utility, and show social preferences that lead them to care about the material resources allocated to others or what other might think of them. It suggests that firms aiming to increase customer’s engagement should consider that people are not only worried about earning money.
People frequently are motivated to do something because they feel good helping others, or because they want others to have a positive impression of themselves. So, how can organisations incorporate this kind of ideas in their strategies to get people adopting desirable behaviours? In an ongoing project at Warwick Business School, we have tried to test out a possible strategy by performing an online experiment. Instead of offering a reward as a consequence of client’s purchases, participants had the opportunity to receive a reward in which they were able to share part of the stake with a friend. We found that people were more engaged as clients to buy in a store when they were able to share with a selected friend in average a 30% of their rewards. This preference did not seem to be driven by an expectation of reciprocity from the friend. Moreover, our evidence suggests that people’s giving was influenced by the concern of how much others might expect to receive from them, and not only about giving away a positive amount to benefit others.
Ignoring opportunities to increase diffusion
When companies want a given product or service to be quickly adopted, it is common to see that they tried to show how their offers have the best value for money or how they can provide monetary rewards that improve the firm’s deals. These kind of strategies where customers are persuaded to appreciate that they are maximising their own benefits by acquiring a given product have been successful in many contexts. Nonetheless, assuming that desires of maximising their own wealth is the only and necessarily the more important mechanism driving people’s motivation is a dangerous mistake that could lead organisations to ignore opportunities to differentiate from others and achieve sustainable success.
Testing out ideas from behavioural science by performing experiments can become the tool to accelerate adoption and diffusion of desirable behaviours, and therefore obtain competitive advantages in a world where differentiation is a a task more and more difficult.
Juan Carpio is a PhD candidate in the Behavioural Science Group at Warwick Business School, working jointly with the Design Council. You can contact him at: firstname.lastname@example.org.
His PhD research explores the variables that can make products and services more likely to be adopted and diffused in a social system. We welcome any interest in research collaboration with either academic institutions or industry.