Sometimes 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 using 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 found that the size of a reward matters far less than how it's delivered. Customers with high balances selected to receive random gifts as part of the study showed drastically different behavior depending on whether the sequence of items they received 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 who got gifts of diminishing value.
This, experts say, illustrates the impact of loss aversion. Decreasing the value of the gifts violates people's expectations and is off-putting. Doing so can eradicate the goodwill generated by the initial gift.
"One thing that we know about loss aversion is that the negative impact of a loss is twice that of the positive impact of an equal gain," says Barry Kirk, director of strategic consulting at loyalty marketing firm Maritz in St. Louis, Mo. " 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're giving away. The element of surprise is perhaps one of the best examples.
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 one that's expected, Kirk says. "The surprise itself becomes part of the value of the reward."
He gives an example of a low-cost "surprise and delight" reward that would be relatively easy and inexpensive for a bank to pull off: give its best customers a consultation with a financial advisor or wealth manager. "Not only are you getting the element of surprise, but you're using it in the context of building a social connection, which is also really powerful to the brain," Kirk says.
But even simpler surprises can excite people 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 delighted winner gushed about North Shore on Twitter so much 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—the out-of-the-blueness—definitely helped with that."
Unexpected gifts also prompt reciprocity; people want to repay the favor, says George Loewenstein, a professor of economics and psychology at Carnegie Mellon University. He did the study at the regional bank with Emily Haisley, a post-doctoral associate in organizational behavior at the Yale School of Management.
They found, months after customers received the unexpected rewards, their account balances were $6,000 higher than a similar group that received no rewards.
Making rewards unpredictable can help prevent the sense of entitlement that often sets in when people repeatedly receive the same benefit, like cash back or airline miles. This can also prompt them to take more notice of what they are getting. "The brain is really wired to stop paying attention to what is predictable," Kirk says.
A $25 blender someone chooses from a random list of inexpensive items might be more memorable and potentially create more loyalty than getting a cash-back reward with higher value, for example. "That blender, not only does it feel good to get the reward, but there's the intrinsic value of having worked for it. I see it. I'm reminded of it. Somebody asks me, 'Hey you got a new blender. Where did you get it?'"
