Paying Money to Get a Reward? An Empirical Investigation
into Consumer Behavior in Retail Loyalty Programs
Geert Noordzij
Paying Money to Get a Reward? An Empirical Investigation
into Consumer Behavior in Retail Loyalty Programs
Master Thesis
University of Groningen
Faculty of Economics and Business Department of Marketing
August 5th, 2009
Name: Geert Noordzij
Student number: 1473115
Address: W.A. Scholtenstraat 11A
9711XA Groningen
E-mail: g.noordzij@planet.nl
Telephone: +31 (0)6 233 266 28
First Supervisor: Dr. Laurens M. Sloot
Management summary
Table of contents
Management summary ... 3
1. Introduction ... 6
1.1. RESEARCH PROBLEM ... 6
2. Literature review ... 9
2.1. THE LOYALTY CONCEPT ... 9
2.1.2. Definition ... 10
2.1.3. Spurious loyalty and Latent loyalty... 11
2.1.4. Critical remarks ... 11
2.2. LOYALTY PROGRAMS – ADOPTION AND EFFECTIVENESS ... 13
2.2.1. Definition ... 13
2.2.2. Loyalty program adoption by retailers ... 14
2.2.3. Participation in loyalty programs by consumers ... 16
2.2.4. Program data usage ... 16
2.2.5. Research on loyalty program effectiveness ... 17
2.3. LOYALTY PROGRAMS – DESIGN AND REWARDS ... 20
2.3.1. Participation in loyalty programs ... 20
2.3.2. Reward structure ... 23 2.3.3. Reward redemption ... 25 2.4. CONCLUSION ... 26 3. Conceptual Model ... 27 4. Research design ... 32 4.1. METHOD... 32 4.2. PRECAUTIONARY MEASURES ... 33 4.3. EXECUTION ... 33 4.4. PLAN OF ANALYSIS ... 34 5. Results ... 35 5.1. MAIN EFFECTS ... 35 5.2. INTERACTION EFFECTS ... 37
5.3. EFFECTS ON PROGRAM ATTRACTIVENESS ... 37
6. Conclusion and recommendations... 40
7. Limitations and suggestions for further research ... 43
Appendices ... 52
APPENDIX 1: EXEMPLARY SCENARIOS WITH CORRESPONDING QUESTIONS ... 52
Appendix 1.1: Type A scenario ... 52
Appendix 1.2: Type B scenario ... 54
APPENDIX 2: OVERVIEW OF REWARDS THAT WERE USED IN THE SURVEY ... 55
APPENDIX 3: EFFECTS ON PROGRAM ATTRACTIVENESS AND LIKELIHOOD TO JOIN ... 56
APPENDIX 4: EFFECTS OF PROGRAM ATTRACTIVENESS AND LIKELIHOOD TO JOIN ON REDEMPTION OPTION AND WILLINGNESS TO PAY ... 57
Appendix 4.1: Regression analysis on redemption option ... 57
Appendix 4.2: Regression analysis on willingness to pay ... 58
1. Introduction
In recent years, loyalty programs have become ubiquitous in the marketplace. In many retail sectors there is a presence of loyalty programs, as well as in other sectors. Membership rates in the US have been through a booming growth, reaching 1.8 billion memberships in 2008, of which 153.2 million in the grocery sector (Colloquy 2009). Popularity in The Netherlands is no different, where between 80 and 90 percent holds a loyalty card, and 35 percent holds even 4 or more cards (Bijmolt, Ding, Leenheer and Van Willigen (2003).A loyalty program can consist for example of saving stamps to obtain a reward, or out of a card which offers a certain percentage discount. These programs have several aims, including enhancing customer loyalty to increase profitability and gathering useful data regarding purchase behavior and customer characteristics. Academics have done a lot of research into the effectiveness (e.g. Lewis 2004; Meyer -Waarden 2007; Liu and Yang 2009) as well as on the design (e.g. Roehm, Pullins and Roehm Jr. 2002; Homburg, Droll and Totzek 2008; Smith and Sparks 2009) of loyalty programs. Even though it may be hard to determine the exact gains of a loyalty program, a lot of money is spent to offer customers their obtained rewards, discounts and extra service.
1.1. Research problem
program. The spend level is quite important for the effectiveness of the program: If the spend requirement is too high, participants will be unable to obtain a reward. If the spend requirement is too low, it will not be a challenge to obtain enough points. Both situations will most likely not evoke a change in buying behavior. Furthermore, if the spend requirement is too low, participants will claim too many rewards leading to high costs for the retailer.
Sometimes, a customer has to pay an additional amount of money before he can claim a reward. Stauss, Schmidt and Schoeler (2005) found that redemption costs can be very frustrating for a customer. The frustration for these costs stems from having to pay money for a reward for which you already did considerable effort to obtain.
However, sometimes customers may not be able to meet the requirement of the program (i.e. fail to collect enough stamps) and may therefore not to eligible to redeem a reward. Many programs therefore offer two redemption options: One option to obtain the reward for free and one option to redeem a reward with only a part of the required amount of stamps at the costs of having to pay some additional money. This option also enables customers who spend less money each week to still be able to obtain a reward, i.e. it improves the relevance of the program. Also, it requires less effort to obtain a reward for fewer stamps. In that sense, a customer can lower the effort he has to make to obtain the reward in exchange for money.
The purpose of this research is to find an answer on how and under which conditions the choice for redemption options varies, and how this option influences the attractiveness of the program. In addition to this, research will be done on the willingness to pay extra money for a reward if they do not manage to collect enough stamps or points in order to obtain the reward.
2. Literature review
In this chapter, a review of existing literature of loyalty programs and loyalty program design will be presented. This will be quite extensive to provide a better understanding of loyalty in general and how loyalty programs are built to enhance loyalty. Within this literature review, several aspects of the design of a loyalty program will be highlighted and elaborated upon to provide a sufficient basis for the hypothesis seeking to find and answer on the research question. The structure of this chapter is as follows: First of all, the meaning of loyalty will be discussed together with its importance. Second, the adoption of loyalty programs by retailers will be discussed together with previous research on the effectiveness of loyalty programs. Third, the design of loyalty programs will be discussed. This chapter will provide the basis for the conceptual model presented in chapter three.
2.1. The loyalty concept
2.1.2. Definition
In literature, the term ‘loyalty’ is often used as a synonym for ‘retention’ (Uncles, Dowling and Hammond 2003; Gustafsson, Johnson and Roos 2005). However, Kumar and Shah (2004) argue that just measuring loyalty on basis of purchase behavior is insufficient to measure ‘true’ customer loyalty. In line with this comment, Dick and Basu (1994) have made a distinction between behavioral loyalty and attitudinal loyalty. Whereas behavioral loyalty considers loyalty in operational terms such as purchase behavior, attitudinal loyalty focuses on the attitude a consumer has of a brand compared to other brands. Oliver (1999) argues as well that loyalty goes beyond retention and comes up with the following (widely cited) definition:
[loyalty is] a deeply held commitment to rebuy or repatronize a preferred product/service consistently in the future, thereby cause repetitive same-brand or same brand-set purchasing, despite situational influences and marketing efforts having the potential to cause switching behavior.
Although the result in terms of retention might be the same, this definition requires a lot more than just retention in order to be able to speak of a loyal customer. Incorporating a ‘deeply held commitment’ in the definition implies that it clearly includes an attitudinal aspect, in line with Dick and Basu (1994).
In research on loyalty programs, both attitudinal and behavioral loyalty is often measured in order to determine the effectiveness of a program.
Attitudinal loyalty in the context of loyalty programs has been measured by using the following constructs:
• Purchase intentions (Rust, Zeithaml and Lemon 2002) • Satisfaction (Bridson, Evans and Hickman 2008)
Behavioral loyalty is often measured in terms of:
• Share of wallet (SOW) (Mägi 2003; Leenheer, van Heerde, Bijmolt and Smidts 2007) • Repeat purchases (Sharp and Sharp 1999)
• Purchase frequency (Lewis 2004)
• Customer retention (Meyer-Waarden 2007)
2.1.3. Spurious loyalty and Latent loyalty
The attitudinal aspect of loyalty is quite important. For example, a customer might be living close by a certain supermarket and therefore spend all his money there. This kind of loyalty is born out of inertia and strongly related to a situational factor (in this case, the proximity of the supermarket) rather than to attitude. Dick and Basu (1994) identify this as spurious loyalty. If the customer decides to move to a different city, it is highly unlikely that he will still continue to do his shopping at that same store. In business-to-business context, there is a possibility that a loyal customer will be loyal to the salesperson he is doing business with rather than being loyal to the company itself (Palmatier, Scheer and Steenkamp 2007). If the salesperson were to switch companies, there is a high chance that some of his customers will follow him to his new company as well.
However, attitude alone is also insufficient in defining loyalty. If a person has a very high attitude toward a certain brand, but is unable to make a purchase (e.g. because of the high price), one cannot speak of loyalty either (Martin, Ponder and Lueg 2009). This has been defined by Dick and Basu (1994) as latent loyalty.
2.1.4. Critical remarks
Furthermore, it should be noted that 100% loyalty hardly exists since many consumers appear to spend their money of a few brands or stores. This is also referred to as ‘polygamous loyalty’ (Dowling and Uncles 1997).
2.2. Loyalty programs – Adoption and effectiveness
This section will deal with the aspects of loyalty programs and is organized as follows: First, a definition of loyalty programs is given including a classification of loyalty programs. Second, the reasons for a firm to adopt a loyalty program are discussed together with the objectives for the firm. Third, the adoption of loyalty programs by consumers is discussed. The design of loyalty program will play a central role in this discussion. Finally, the effectiveness of loyalty programs is discussed based on the findings of earlier research.
2.2.1. Definition
Before continuing to look at several aspects of loyalty programs, it is important to have a solid definition of the construct. Based on existing literature (e.g. Leenheer 2006), in this research loyalty programs are defined as follows:
A loyalty program is an integrated system of relational marketing efforts aimed at increasing attitudinal and behavioral loyalty of customers participating in the program.
The relational marketing efforts either directly or indirectly reward participants for their purchase behavior. Usually they consist of one or more of the following features:
• Discounts • Coupons
• Saving points to attain rewards
• Special service (e.g. fast check-in at the airport)
• Receiving personalized offers based on purchase behavior
TABLE 1 – Classification of loyalty programs Type of program Features
Discount program Immediate discount, no purchase registration
Savings program Saving for a reward through stamps, no purchase registration
Simple relational program Either saving for reward or obtaining discounts with purchase registration Enhanced relational program Either saving for reward or obtaining discounts with purchase registration and
personalized offers and communication based on buying behavior
Furthermore, it is important to note that loyalty programs usually run for a long period of time, sometimes even indefinitely. There are also many loyalty-increasing programs being run by retailers that have a short time horizon of only 2-3 months. Even though most research done in this field has focused on long-term loyalty programs, many lessons learned from long-term programs can also be applied to short term programs.
2.2.2. Loyalty program adoption by retailers
(2008) have shown that a company with and a company without a program can operate profitably in the same market. Dowling and Uncles (1997) warn that companies should not just introduce a program as a ‘me-too’ scheme since it may for instance trigger a competitive reaction which may comprise a program with a slightly better value. Furthermore, a loyalty program should have a fit with the company’s strategy and capabilities (O’ Brien and Jones 1995). If the incentives the program offers do not match with the brand associations of the firm, post-program loyalty (i.e. loyalty after the program is discontinued) may not be affected in a positive manner (Roehm, Pullins and Roehm Jr. 2002).
Leenheer and Bijmolt (2003) found that buying frequency is unrelated to program adoption. This is in contrast with earlier work of Grönroos (1995) who mentions that relationship marketing is more effective in markets with high buying frequency. However, using a different model on the data of Leenheer and Bijmolt (2003), Leenheer and Bijmolt (2008) conclude that purchase frequency is in fact a very significant driving factor of loyalty program adoption. Other factors driving adoption include diversity in profitability and customer orientation (Leenheer and Bijmolt 2008).
2.2.3. Participation in loyalty programs by consumers
Loyalty programs would not be so popular amongst retailers without the enthusiasm of consumers for them. Especially loyalty programs featuring a loyalty card are very popular amongst consumers; it is estimated that somewhere near 80% of all households in the Netherlands has at least one loyalty card in possession (GfK 2002). In some countries (e.g. the US) this figure is even near 90% (Berman 2006). In the Netherlands, especially the Bonuskaart of Albert Heijn is very popular. This card, issued in 1998, was adopted by 63% of all customers of Albert Heijn in 2000 (GfK 2001). However, consumers have the possibility to opt in for more than one loyalty program featuring a loyalty card within a specific market. This implies that in theory consumers can have a loyalty card for every supermarket chain they visit.
Despite the apparent popularity of loyalty cards amongst consumers, Mauri (2003) finds that many consumers who joined a loyalty program featuring a loyalty card are in fact not ‘loyal’ to their card. Many consumers appear to stop using their card or forget to take the card with them. Bolton, Kannan and Bramlett (2000) and Wright and Sparks (1999) find similar results regarding low card usage by participants in a loyalty program featuring a loyalty card. If customers are not card-loyal, it will distort obtained program data (see section 2.2.4) and makes the user less involved with the loyalty program, obviously diminishing its effectiveness (Yi and Jeon 2003). To counter this problem, Mauri (2003) suggests retailers should offer promotional incentives frequently to increase usage of the card.
2.2.4. Program data usage
the lack of ability to analyze the huge amounts of data generated by loyalty cards (Byrom 2001). Furthermore, in some countries it may be difficult to obtain the necessary information from customers in order to make effective use of the data. Customers in France for example are very reluctant to give away personal information to a retailer (KPMG 2001). More on concerns about privacy sensitive-information related to loyalty programs will be discussed in section 2.2.x. Finally, a critical note should be placed considering data usage. As mentioned before, Dowling and Uncles (1997) mention that companies should not only look at data of their current customers but also consider potential customers. Furthermore, Mauri (2003) argues that data on purchase behavior can only provide useful results if the user of the card is card-loyal, which is often not the case.
2.2.5. Research on loyalty program effectiveness
success (Meyer-Waarden 2007). Current research most of the time criticizes earlier research on the research methods. Lewis (2004) is critical regarding the results of Sharp and Sharp (1997). He argues that the research of Sharp and Sharp lacks dynamic data regarding consumer response. Similarly, Lal and Bell (2003) mention that researches should take good care evaluating loyalty programs on effectiveness because of the effect of ‘self-selection’. Self-selection refers to the discussion whether participants of a loyalty program become high spenders, or the other way around (i.e. high spenders participate in the loyalty program). Customers who spend more money in a store will obviously be more attracted to loyalty program than customers who hardly spend anything because it benefits them more. Leenheer et al. (2007) have addressed this problem by developing a model which accounts for self-selection. Their results indicate a positive effect on SOW, however this effect was found to be seven times smaller than without accounting for self-selection. Again, this shows how easily outcomes of research can differ in this field.
TABLE 2 – Effectiveness of loyalty programs across different empirical studies
Authors Conclusion
Sharp and Sharp (1999) No effect on repeat purchases Bolton Kannan and Bramlett
(2000)
Less sensitivity to offers of competition No effect on retention
Rust, Zeithaml and Lemon (2000) Positive effect on purchase intentions
Kim, Shi and Srinivasan (2001) Programs are profitable as long as light users are not price-sensitive De Wulf, Odekerken-Schröder and
Iacobucci (2001)
No effect on SOW
Lal and Bell (2003) More effect on behavior of light users than on heavy users
Mägi (2003) No effect if customer participates in more programs in the same industry Verhoef (2003) Positive effect on SOW and retention
Kim, Shi and Srinivasan (2004) Programs are an efficient way to deal with over-capacity Noordhoff, Pauwels and
Odekerken-Schröder (2004)
Effects on behavioral loyalty differ between Singapore and The Netherlands
Lewis (2004) Positive effect on purchasing frequency, order size and revenue Taylor and Neslin (2005) Positive contribution to profit
Meyer-Waarden and Benavent (2006)
No effect on repeat purchase patterns
Leenheer, van Heerde, Bijmolt en Smidts (2007)
Positive effect on SOW
Meyer-Waarden (2007) Positive effect on SOW and Retention Bridson, Evans and Hickman
(2007)
Positive effect on store satisfaction
Liu (2007) More effect on behavior of light and medium users than on heavy users Wirtz, Mattila and Lwin (2007) Positive effect on SOW
A loyalty program can increase customer loyalty several ways (Leenheer et al. 2007). First of all, the reward offered increases the value a company offers to a customer. If the value of the reward is larger than the (non-monetary) cost to obtain the reward, it adds to the value proposition of the company offering the program. Second, the loyalty program has the possibility to generate switching costs between retailers (Dick and Basu 1994; Reinartz and Kumar 2000). If a customer is committed to a savings program, he will lose all progress made within that program if he decides to switch to another retailer. However Hartmann and Viard (2008) argue that in the case of saving up for a single reward the contribution of these increased switching costs to the effectiveness of the program is not as strong as suggested. Their argument is that loyalty programs consist for the main part of frequent customers for whom the reward is easily achievable. Also, a large part of the less frequent customers tend not to get close to the reward so the switching costs do not apply. Therefore, the effect of switching costs depends on how the amount of frequent and infrequent customers participating in the program in relation with the difficulty to obtain a reward. Furthermore, it should be noted that switching costs also depend on the timeframe of the loyalty program. If the timeframe is unlimited, a customer will not suffer from any switching costs if he also buys products at another store now and then (Leenheer et al. 2007). A third way in which a loyalty program enhances loyalty is through psychological benefits derived from the program. For instance, customers can use the reward program as an excuse to consume luxury goods (Kivetz and Simonson 2002a). Furthermore, consumers will enjoy it if they are treated better than others and derive status from it (Feinberg, Krishna and Zhang 2002; Drèze and Nunes 2009).
The actual way in which a loyalty program is able to enhance loyalty is dependent on several factors. First of all, it is obvious that the design of the program will largely determine how effective it will be in increasing loyalty. The design of loyalty programs will be discussed in the next section. Furthermore, customer response to the program, management commitment and whether the program fits with the current strategy of the company are also important (O’ Brien and Jones 1995; Berman 2006).
should be made to be certain that the gains of a loyalty program outweigh the costs. A way to reduce the cost of a program could be to engage in a partnership with other companies (Berman 2006). However, despite the success of some multi-vendor programs (e.g. Airmiles), there is no evidence that a multi-vendor program is more attractive to customers compared with a single-vendor program (Dorotic, Fok, Verhoef and Bijmolt 2009).
2.3. Loyalty programs – Design and rewards
It was already mentioned in the previous paragraph that the effectiveness of a loyalty program is largely dependent on the design of the program. The design of a loyalty program has essentially two aims: participation and stimulation. The aim of participation comprises the attractiveness to make customers enroll in the program. If customers do not participate in the program, the program obviously has no effect. Stimulation comprises changing the buying behavior of participating customers in a manner that will lead to more profits for the company. This section will deal with the design of loyalty programs and the reward structure within those programs and provide the basis for the conceptual model in the next part.
2.3.1. Participation in loyalty programs
programs, including impossibility to claim the reward (lack of relevance) and worthlessness of the reward (lack of cash value).
TABLE 3 – Value-adding elements of a reward program Value element Description
Cash value The intrinsic value of a reward
Choice of redemption options How many options the participant has in claiming a reward (e.g. choice from a single product or multiple products, one or more than one company)
Aspirational value Determined by how exciting the reward is (luxury versus necessity)
Relevance Determined by the possibility to obtain the reward considering a timeframe (a reward obtained after 10 years of saving is not relevant)
Convenience Participation and claiming rewards should be possible without hassle and paperwork
Psychological benefits The excitement of belonging to the program and saving (and obtaining) rewards
The elements previously mentioned are elements that customers may consider when making a decision whether to join a loyalty program or not. However, this list is not exhaustive. Furthermore, it is not based on empirical research, nor does it conclude anything about how important customers rate each element. De Wulf, Odekerken-Schröder, de Cannière and van Oppen (2003) have addressed this limitation in their research and found that participation costs drive the participation decision for about 46%. This can be considered quite a high number since program benefits were only rated at 23%. This result is quite logical, since having to pay before entering a loyalty program lowers the overall value of that program. In essence, potential gains are lowered by the costs of participation.
Not only monetary costs are important, non-monetary costs also can play a role in the value perception. According to Soman (1998), customers evaluate a reward program by weighing the value of the reward against the perceived effort that has to be made to claim it. In this research ‘perceived effort’ is defined using the definition of Kivetz and Simonson (2003, p456):
This implies that effort goes beyond just collecting stamps or filling out a redemption form. However, according to Soman (1998) customers are not able to make a rational decision on whether the value of the reward exceeds the value of the effort: It appears that customers value future rewards higher than future effort. An implication of this observation is that the perceived effort a customer has to make to obtain the reward can easily be manipulated by the company in order to enroll a large amount of customers even though the program might require substantial effort.
Monetary costs of a reward program are, however, highly visible and are therefore more likely to have influence on the participation decision. Furthermore, according to loss aversion theory (Kahneman and Tversky 1979), current participation costs may look larger than the future gains since those future gains are still uncertain. A similar outcome is predicted by the time outcome valuation model by Mowen and Mowen (1991) on basis of the assumption that current losses are overweighed and future gains are discounted. From a customer perspective, the negative perceived value of the program will keep the customer from participating.
the loss of privacy. In conclusion, asking customers privacy sensitive information upon enrollment will not really influence the enrollment decision as long as it is clearly communicated that the information supplied will be treated with care and confidentiality.
Another determinant driving participation in loyalty programs is so-called ‘idiosyncratic fit’ (Kivetz and Simonson 2003). This theory states that when consumers perceive they have an effort advantage over others they will feel more attracted to the program. Effort advantage means in this setting that it is easier for a certain consumer to fulfill the program requirements (i.e. obtain a reward) than others. Companies can use this information to communicate program advantages to consumers in order to persuade them to sign up for a program. This theory might at first imply that increasing the program requirements will have a positive effect on program attractiveness. However, too much effort will also lower program attractiveness due to the increased effort. In conclusion, program requirements should be both challenging (Kivetz and Simonson 2003; Nunes and Drèze 2003) but also manageable to prevent consumers from discarding the program because of lack of relevance (O’Brien and Jones 1995; Nunes and Drèze 2003). Heavy users mostly do not have to make much of an effort to obtain a reward and may not be attracted as much by the reward program. In general, this is not such a big problem since the purchase behavior of heavy users is hard to change anyway (Liu 2007). Wansink (2003) gives as reasons for this phenomenon that the consumption levels of heavy users cannot raise much further whereas light users might switch from purchasing multiple brands (or at multiple stores) to just one.
2.3.2. Reward structure
lock-in effect and combined currency pricing are of importance and will therefore be elaborated in this section.
Kim Shi and Srinivasan (2001) argue that, in case of delayed rewards, consumers incur switching costs if they switch to another retailer during a program. The rationale behind this is that consumers already halfway to reaching their reward will lose all the effort made if they decide to quit the program. This is a so-called ‘lock-in’ effect. However, results from a study by Hartmann and Viard (2008) show that switching costs are not relevant for a reward program. They argue that customers purchasing with a low frequency may not be interested in the reward in the first and will therefore not care if they lose the progress to the reward. Apart from that, customers purchasing with a low frequency will rarely come close to earning the reward to make the switching costs really count. In order to enlarge the lock-in effect, (i.e. to also make it count for customers with a low purchasing frequency) Nunes and Drèze (2006) propose the so-called endowed progress effect. This effect in based on research that shows that people who are given a small advancement toward reaching a goal (e.g. an amount of stamps required to obtain a reward) are more likely to reach that goal. In the specific case of a loyalty program, people are both more likely to participate in the program and change their behavior to obtain the reward. A condition for this effect to hold is that there should be a valid reason for providing the customer with the endowment. Similar, Kivetz, Urminsky and Zheng (2006) found that customers will purchase with increased frequency as they come to close to reaching the requirement to obtain a reward. In that way, one can say that customers are willing to exert more effort when they come close to obtaining their reward.
class. Looking at how much a certain ticket costs in real currency and points, an intrinsic value for a single can be derived. Research by Van Osselaer, Alba and Manchanda (2004) shows that these points are often overvalued. This can partly be an explanation for the outcomes of the research of Drèze and Nunes (2004). In relation to this research, one could argue that a loyalty program offering an option to redeem a reward for fewer stamps and an additional amount of money is also a form of combined currency pricing.
2.3.3. Reward redemption
As mentioned in the previous section, it is important that participants in a loyalty program are actually able to redeem their reward. Reward redemption appears to enhance the perception of the retailer (and the reward scheme) in the eyes of the customer (Smith and Sparks 2009). The rewards may also create a sense of obligation in the minds to the customer to repatronize the retailer if the customer has previously received a reward (Kumar and Shah 2004). Obviously, this sense of obligation will only manifest if the reward is actually redeemed which is often not the case (Smith and Sparks 2009). As noted in the previous paragraph, consumers tend to be optimistic about their ability to obtain a reward (Soman 1998). Although a consumer might have had a certain goal in mind when the decision to participate in the reward scheme was made, some things might come in the way of reaching that goal. For instance, consumers who are saving for a hedonic reward may be tempted to redeem their points halfway to reaching their goal in order to obtain a utilitarian product (Smith and Sparks 2009). Consequently, this may evoke a sense of guilt which in turn might hurt the positive effect of the reward scheme on the perception of the retailer. Furthermore, some loyalty programs offer the option to obtain the reward with fewer stamps but with an additional payment.
2.4. Conclusion
3. Conceptual Model
In this chapter, several aspects from previous literature will be used in order to generate a better understanding of customer reaction to certain elements of loyalty programs. In line with our research problem as outlined in paragraph 1.2, several hypotheses will be developed in order to gain more insight in which influence the preference for redemption option, and how this option influences the attractiveness of the program. Furthermore, several hypotheses regarding the willingness of customers to pay extra money for a reward will be developed.
First of all, it was already mentioned that within a loyalty program customers often have the option to redeem a reward even if they have not acquired enough stamps to redeem the reward for free. In such a case the customer has to pay a small amount of money, i.e. an additional payment. The height of this additional payment varies across different loyalty programs. Even though this is usually only a small amount of money as compared to the retail value of the reward, it can be expected that it refrains customers from participating actively the program (i.e. making an effort in terms of increasing their spending to meet the requirements). Furthermore, Stauss et al. (2005) found that redemption costs are a source of frustration of participants in loyalty programs. Therefore, it can be hypothesized that:
H1: A higher additional payment will lead more consumers to choose to obtain the reward for free.
order to obtain the reward can also affect the choice for a redemption option. If the customer has to spend a large percentage of his grocery budget in order to get the reward, he might prefer to spend a smaller percentage and pay some extra money in order to obtain the reward. This lowers the effort to spend almost the entire grocery budget in the same store. This discussion leads to the following hypotheses:
H2a: Consumers who have to spend a large part of their grocery budget in the same store
in order to obtain the reward will more likely chose for an option to save for fewer stamps and pay some extra money rather than save up in order to get the reward for free.
H3a: Consumers confronted with a loyalty program in a secondary store as opposed to a
primary store will more likely chose for an option to save for fewer stamps and pay some extra money rather than save up in order to get the reward for free.
Within a loyalty program, some customers will have to exert more effort in order to meet the program requirements than others; it will be easier for someone who spends a lot of money on groceries each week. Furthermore, as mentioned before, there may be some customers who have to reallocate a part of their budget to a secondary store. This can also be considered as making an effort since it will force the customer to change his behavior. Customers who make a lot of effort to meet the program requirement like to receive a reward for their effort (Kivetz and Simonson 2002a). If, after exerting much effort to meet those requirements the customer fails to meet those requirements, the customer may feel as if he is missing out on something he should have gotten. In short, the store type of the customer the promotion runs in as well as the required percentage of the budget the customer has to spend (spend requirement) in order to meet the program requirements may be influencing the willingness to pay for a reward. Therefore, it is hypothesized that:
H2b: In a situation in which the customer has to spend a larger part of his budget in
H3b: In a situation in which the customer has to reallocate a part of his budget from a
primary store to a secondary store in order to meet the program requirements, customers will be willing to pay a higher amount of money in order to get their reward.
As mentioned before, the perceived cost of obtaining the reward consists of both monetary and non-monetary elements. The non-monetary element consists for the largest part of perceived effort. However, there are also psychological costs present. Kivetz and Simonson (2002a) already described the preference for hedonic (luxury) rewards in loyalty programs. Since spending money on hedonic products evokes guilt with many consumers, a loyalty program enables consumers to obtain hedonic products without bearing as much of the psychological cost of a regular ‘out-of-pocket’ expenditure (Kivetz and Simonson 2002b). If a hedonic reward is offered, customers will be more likely to sign up for the program since it makes up for their effort of meeting the program requirements (Kivetz and Simonson 2002a). However, if hedonic reward is offered, an additional fee payable can be expected to have not only a negative effect on the net value of the reward, but also on the psychological cost of the reward. The reasoning behind this is that the additional fee will evoke a sense of guilt with the consumer since it then still requires the customer to spend money (albeit just a small amount) on a hedonic product. Therefore, if the reward type is hedonic, it is expected to increase resent to an additional fee to be paid when claiming the reward. This leads to the following hypotheses:
H4a: Offering a hedonic reward as opposed to a utilitarian reward will increase the
preference to obtain the reward for free rather than saving for fewer stamps and paying some additional money.
H4b: Offering a hedonic reward as opposed to a utilitarian reward will lower the
willingness to pay for the reward for a customer who has not collected enough stamps to obtain the reward for free.
accelerate their purchases as they approach their goal. This is based on the theory that people exert more effort as they come closer to their goal as first proposed by Hull (1932). Furthermore, a customer closer to its goal will face more sunk costs if he is unable to claim a reward. Based on loss aversion theory (Tversky and Kahneman 1991) giving up the progress to the reward can be seen as a loss. To prevent this loss, the willingness to pay to obtain the reward after all could increase. Therefore, the hypothesis is as follows:
H5: The closer a customer is to reaching his reward, the more he will be willing to pay in order to still obtain the reward.
Finally, it can be expected that there are some interaction effects present. If a customer has a larger budget, the additional money to be paid for the reward is relatively smaller. Therefore it can be expected that a customer with a larger budget will care less about the additional payment than a customer with a smaller budget. The hypothesis is as follows:
H6: The height of the weekly grocery budget is of moderating influence on the relation between additional payment and the choice for redemption option.
The mentioned hypotheses are displayed graphically in Figure 1 on the next page. An overview of the mentioned variables with a short description is displayed in Table 4.
TABLE 4 – Overview of the relevant variables Independent variables Description
Additional payment The amount of money a customer has to pay in order to obtain the reward for less stamps
Store type Describes whether the store in which the program runs is visited by the customer as a primary or secondary store
Reward type Describes whether the reward is of hedonic or utilitarian nature
Spend requirement The percentage of his grocery budget the customer has to spend during the time the program runs in order to obtain the reward for free
Goal distance How many stamps or points the customer lacks in order to obtain the reward for free
Dependent variables Description
Redemption option preference Indicates whether the customer prefers to obtain a reward for free or rather saves up for less stamps and an additional payment
4. Research design
This chapter will deal with how the hypotheses are tested. First, the method of research will be explained. Second, some precautionary measures will be discussed that were taken to reduce any bias in the research. Third, the way how the research was executed will be explained. Finally, the plan of analysis will be discussed and elaborated on the statistical tests that were used.
4.1. Method
To test the hypotheses, an experiment was performed by means of an internet survey which confronted each respondent with four different hypothetical loyalty programs. This way it is possible to measure how different properties of a loyalty program as well as the situation the customer is in affects the choice for a redemption option and the willingness to pay extra money for a reward. A respondent was either confronted with four scenarios to measure the choice for a redemption option (type A) or with four scenarios to measure the willingness to pay for a reward
(type B). Type A scenarios typically test hypotheses H1, H2a, H3a, H4a and H6 whereas type B
scenarios test H2b, H3b, H4b and H5.
The scenarios of type A vary on: Store Type (Primary/Secondary), Spend Requirement (95% or 65% of the grocery budget), Reward Type (Hedonic/Utilitarian) and Additional Payment (1,99/3,99/5,99/7,99). This implies a 2x2x2x4 factorial design.
4.2. Precautionary measures
Some precautionary measures were taken to reduce any bias in the research. Respondents would either receive scenarios of type A or type B, not a combination of both. This was done to reduce the influence that some scenarios might have on each other. In particular, the additional payments mentioned in type A scenarios might act as reference prices for the willingness to pay in type B scenarios. To eliminate possible discrepancies resulting from a poorly chosen reward product, or too much difference in appreciation for a certain product as a reward, four different products were used within each category of Reward Type. Furthermore, a respondent would never be placed twice in a scenario with the same product or additional payment to avoid comparisons between the two. To aid the respondent in distinguishing between the different scenarios, the variables subject to change were put in a bold font making them more visible. Finally, two questions were included to serve as control variable to control for increased willingness to pay because the program just suits a respondent better (e.g. the reward is more appealing or the respondent has a certain overall attitude towards loyalty programs).
4.3. Execution
offering loyalty programs for retailers worldwide. However, the questions regarding this research were placed in front of the other questions to make sure that respondents were not influenced by the content of the other questions. In total, 498 Dutch respondents were confronted with four scenarios. These respondents were adapted from a panel of the market research company GMI. The demographic characteristics of the respondents are shown in Table 5. As can be seen, the sample is quite representative for the Dutch population. The age group ‘24 or below’ is under represented because it was chosen to send the questionnaire only to people aged over 18 since underage children are most often not responsible for grocery shopping.
TABLE 5 – Demographic characteristics of the sample
Demographic Variable Sample (n=498) The Netherlands (CBS 2009)
Sex Female Male 49.2% 50.8% 50.5% 49.5% Age 24 or below 25 till 34 35 till 44 45 till 54 55 or older 5.4% 15.5% 23.7% 27.7% 27.7% 29.8 % 12.1% 15.2% 14.8% 28.1% Household size 1-2 persons 3-4 persons 5 or more persons 58.2% 35.8% 6% 68.2% 25.8% 5.9% 4.4. Plan of analysis
5. Results
The results of the survey are displayed below in Table 6. The outcomes of the ANOVA and χ2
-tests are displayed in Table 7 on the next page. First, the main effects will be discussed and after that the interaction effects. Finally, the effect of offering an extra redemption option on the attractiveness of the program and the likelihood to join the program will be discussed.
5.1. Main effects
First, the effects on the RO variable will be discussed. Hypothesis H1 was aimed at researching the influence of the Additional Payment on the RO. The results of the χ2-test show that this hypothesis is accepted (χ2 = 69.898, p < 0.01). Hypothesis H2a proposed that the Spend
Requirement is influencing the RO. The results show that this hypothesis is rejected (64% versus
65%, χ2 = 0.168, p > 0.1). Furthermore, hypothesis H3a regarding the effect of the Store Type on
the RO is rejected as well (66% versus 63%, χ2 = 1.240, p > 0.1).
TABLE 7 – Results of ANOVA and χ2-tests
Percentage choosing free reward WTP
χ2-value p-value F-value p-value
Reward type .278 .320 2.275 .133
Spend requirement .168 .363 .031 .861
Store type 1.240 .146 .015 .901
Goal distance n/a 10.265 .002
Additional payment 69.898 .000 n/a
Additional payment *
Spend requirement 1.004 .315 n/a
Note: significant relations (p<0.05) are highlighted in bold
Finally, hypothesis H4a predicting that offering a hedonic reward as opposed to a utilitarian
reward will increase the preference to obtain the reward for free rather than saving for fewer
stamps and paying some additional money is also rejected (64% versus 65% , χ2 = 0.278, p > 1).
Since all but one of the dependent variables are insignificant, a logistic regression does not make sense and will therefore not be performed.
Next, the effects on the WTP will be discussed. The results of the ANOVA show that hypothesis H2b stating that increasing the Spend Requirement will lead to higher WTP is rejected (3.82
versus 3.89, F = 0.31, p > 0.1). Furthermore, hypothesis H3b proposing that consumers in a
secondary store will have an increased WTP is also rejected (3.79 versus 3.93, F = 0.15, p > 0.1). Hypothesis H4b stating that the Reward Type will influence the WTP is rejected as well (3.60
versus 4.12, F = 2.275, p > 0.1). Finally, the effect of Goal Distance on the WTP ís significant, however not in in the hypothesized direction (3.43 versus 4.28, F = 10.265, p < 0.01).
5.2. Interaction effects
There was also one interaction effect hypothesized. Hypothesis H6 proposed an interaction effect between Additional Payment and Spend Requirement on RO. Regression results show that this interaction effect is not present (χ2 = 1.004, p > 0.1). This is however not a strange result since the main effect of Spend Requirement was not found present either.
5.3. Effects on program attractiveness
asks respondents directly how attractive they find the program with as result that the attractiveness consists of all elements of the program, including the attractiveness of the rewards used and the attractiveness of the other program features such as the height of the additional payment and the presence of another redemption option. The table in Appendix 3 shows how the attractiveness of the program and the likelihood to join the program differ across the different variables. An interesting observation is that there is that the scenarios which featured a program with a redemption option with additional payment are rated more highly on attractiveness and likelihood to join (3.84 versus 3.39, t = 4.984, p < 0.01 and 3.81 versus 3.42, t = 4.015, p < 0.01 respectively). It also appears that there are differences between the attractiveness and likelihood to join if the height of the additional payment varies.
FIGURE 3 - Additional Payment X Reward Type
6. Conclusion and recommendations
The goal of this research was to find an answer on how and under which conditions the choice for redemption options varies, and how this option influences the attractiveness of the program. Furthermore, there was interest in the propensity of customers to pay money for a reward in case they fail to meet the program requirements. Even though the results were not in line with the developed hypothesis, there were indeed some interesting observations. First of all, as proposed by Hypothesis H1, a higher additional payment does indeed lead to more consumers choosing to obtain the reward for free. The other independent variables did not seem to have a direct effect on the RO or WTP. An exception to this observation is Goal Distance, which was hypothesized to have a negative effect on WTP. However, the opposite appeared to be true. A larger Goal Distance actually increased the WTP. A possible explanation for this could be that customers start to value each stamp, as proposed by Drèze and Nunes (2004). Consequently, this value is used by the customer to calculate how much they are willing to pay if he still requires a certain amount of stamps. In that case, a larger Goal Distance would indeed increase WTP.
The results have found evidence for a mediating effect of program attractiveness between the independent variables and RO and WTP. In this case, the independent variables Store Type and Reward Type become significant, together with an interaction effect of Additional Payment. These relations are displayed in Figure 5 on the next page. Furthermore, it has been proven that an additional redemption option significantly increases the attractiveness of the program, even if the additional payment is relatively high.
FIGURE 5 - Renewed model
The results of this research have several implications. First of all, it appears that in a reward program, offering an option to redeem a reward for less stamps with an additional payment seems to increase the attractiveness of the program and thereby the intentions to participate in the program. Retailers should therefore include such an option in their programs if they wish to increase program attractiveness and participation. Second, people seem to find ut
more attractive than hedonic rewards. Even though people may like to spoil themselves with luxury rewards, utilitarian rewards are perceived as more attractive in this loyalty program setting. Third, people rate a loyalty program in their
program in a secondary store. This implies that a company attempting to lure new customers to the store or increase the SOW of secondary customers should put a large focus on
program which is attractive enough to appeal even to the secondary customers
of the additional payment is also influencing the attractiveness. Albeit not directly, the additional payment influences the attractiveness through reward type and store type. When offerin hedonic reward, a higher additional payment will definitely decrease the program attractiveness whereas it does not matter that much for a utilitarian reward. Furthermore, customers will be put off more easily by an additional payment if the program is
The results of this research have several implications. First of all, it appears that in a reward program, offering an option to redeem a reward for less stamps with an additional payment he attractiveness of the program and thereby the intentions to participate in the program. Retailers should therefore include such an option in their programs if they wish to increase program attractiveness and participation. Second, people seem to find ut
more attractive than hedonic rewards. Even though people may like to spoil themselves with rewards are perceived as more attractive in this loyalty program setting. Third, people rate a loyalty program in their primary store as more attractive than a program in a secondary store. This implies that a company attempting to lure new customers to the store or increase the SOW of secondary customers should put a large focus on
7. Limitations and suggestions for further research
The results of this research are not without limitations. For instance, the results are based on responses to hypothetical scenarios. This harms the validity of the experiment. When confronted with a situation in the real world, the response to a loyalty program can be different. For example, as stated before in the literature review, some customers might change their preference during the program. Especially when loyalty programs offer multiple products instead of one such as in this research, customers may opt for a different reward than they at first intended to go for. Furthermore, in a hypothetical scenario a respondent is unable to feel effort he has already made to come in a certain situation. This might have influenced the answers on the question regarding the willingness to pay. Further research with an actual loyalty program could examine the effect of different heights of additional payment on different customer profiles.
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Appendices
Appendix 1: Exemplary scenarios with corresponding questions
Appendix 1.1: Type A scenario
Stelt u zich voor dat de supermarkt waar u naast uw reguliere supermarkt soms ook boodschappen doet een spaarprogramma aanbiedt. Dit programma ziet er alsvolgt uit:
Om binnen de gestelde periode 60 zegels te sparen zult u tenminste 95% van uw boodschappen budget moeten uitgeven bij deze supermarkt. Ga er vanuit dat uw budget ongeveer 55 euro per week bedraagt.
Geef aan op een schaal van 1 tot 7 in hoeverre u dit een aantrekkelijk spaarprogramma vindt: Zeer onaantrekkelijk | 1 2 3 4 5 6 7 | Zeer aantrekkelijk
Geef aan op een schaal van 1 tot 7 in hoeverre u van plan zou zijn mee te doen aan dit spaarprogramma:
Ik zou zeker niet meedoen | 1 2 3 4 5 6 7 | Ik zou zeker wel meedoen De komende twaalf weken krijgt u bij iedere 10 euro aan
Stelt u zich voor dat u binnen de gestelde twaalf weken slechts 40 zegels heeft weten te
verkrijgen en het u dus niet gelukt is om een volle spaarkaart te verkrijgen. Hoeveel euro zou u maximaal bereid zijn bij te betalen om alsnog uw kado te ontvangen?
Appendix 1.2: Type B scenario
Stelt u zich voor dat de supermarkt waar u naast uw reguliere supermarkt soms ook boodschappen doet een spaarprogramma aanbiedt. Dit programma ziet er alsvolgt uit:
Om binnen de gestelde periode 60 zegels te sparen zult u tenminste 95% van uw boodschappen budget moeten uitgeven bij deze supermarkt. Ga er vanuit dat uw budget ongeveer 55 euro per week bedraagt.
Geef hieronder aan welke optie uw voorkeur geniet: ( ) Sparen voor 60 zegels en het kado gratis
( ) Sparen voor 40 zegels en bijbetaling van 7,99
Geef aan op een schaal van 1 tot 7 in hoeverre u dit een aantrekkelijk spaarprogramma vindt: Zeer onaantrekkelijk | 1 2 3 4 5 6 7 | Zeer aantrekkelijk
Geef aan op een schaal van 1 tot 7 in hoeverre u van plan zou zijn mee te doen aan dit spaarprogramma:
Ik zou zeker niet meedoen | 1 2 3 4 5 6 7 | Ik zou zeker wel meedoen De komende twaalf weken krijgt u bij iedere 10 euro aan
Appendix 2: Overview of rewards
Utilitarian rewards
Professional frying pan
Luxurious towelset
Hedonic rewards
Two tickets for a soccer match
Treatment in a spa resort
rewards that were used in the survey
Knifeset
Grocery box
Ticket for a theatre play
