Sometimes even a nice gift can turn customers off.
Banks thinking of scaling back loyalty programs should carefully weigh how to do it, because getting it wrong can alienate customers, even if they're still getting something for free. The good news is that a few simple techniques can make even small gifts compelling.
A study conducted at a large regional bank and recently published in the Journal of Marketing Research determined that the size of a reward matters far less than how it is delivered. Customers with high balances chosen to receive random gifts as part of the study showed drastically different behavior based on the sequence in which items they were given increased or decreased in value.
Some received a $35 gas card, and then a $100 gift card months later. Others received the cards in reverse order. In both cases, the gifts were unexpected and included a message thanking customers for their business. Over the ensuing months, those who received gifts that increased in value kept account balances that were, on average, more than $12,000 higher than those sent gifts of diminishing value.
This, experts said, shows the impact of loss aversion. Decreasing the value of the gifts violates expectations and is off-putting. Doing so can eradicate the good will generated by the initial gift.
"One thing that we know ... is that the negative impact of a loss is twice that of the positive impact of an equal gain," said Barry Kirk, the director of strategic consulting at the marketing firm Maritz in St. Louis. "So losing $5 is twice as bad as how good it feels to earn $5."
The upshot for banks with rewards programs is that there are simple, effective ways to maximize the impact of what they give away. Neuroscientists have found that when a gift is unexpected, it releases two to three times as much of the pleasure chemical dopamine in the brain as an expected gift, Kirk said. "The surprise itself becomes part of the value of the reward."
Kirk said an example of a low-cost "surprise and delight" reward could include giving customers a consultation with a financial advisor. "Not only are you getting the element of surprise, but you're using it in the context of building a social connection," Kirk said.
Even simpler gifts can excite, as the $1.8 billion-asset North Shore Bank in Brookfield, Wis., found when it gave $5 Subway gift cards to anyone who became "mayor" of one of its 44 branches on the social media network Foursquare. One winner gushed so much on Twitter that it got mentioned on a few blogs. "Just for one little $5 Subway gift card," says Tim Gluth, North Shore's e-business coordinator. "The surprise ... definitely helped with that."
Unexpected gifts prompt reciprocity; people want to repay the favor, said George Loewenstein, a professor at Carnegie Mellon University who conducted the study with Emily Haisley, an associate at the Yale School of Management. They found, months after clients received the unexpected rewards, their account balances were $6,000 higher than a similar group that received nothing.
Making rewards unpredictable can help prevent a sense of entitlement that can set in when people repeatedly get the same benefit, like airline miles. This can prompt them to take more notice of what they are getting. A $25 blender someone chooses from a random list of inexpensive items might be more memorable than getting a cash-back reward with higher value, for example.
"Not only does it feel good to get the reward, but there's the intrinsic value of having worked for it," Kirk said.
