Finally, it was the weekend but I had to purchase groceries for the upcoming week. Since I was too tired to walk out, I decided to order them online. HappyFresh was giving me free delivery but Grab offered me an additional 10% cashback on my purchase with no delivery charges, so I chose Grab. While this sounds like an obvious choice to a consumer, the reward gateway could determine the future of a company.
We all love rewards, discounts and vouchers, don’t we? Statista, in their 2021 report, cited that free shipping was a key factor driving purchase decisions in e-commerce space followed by rewards including coupons and discounts. This practice of customer acquisition and retention is spanning to other sectors like the banking sector. Financial institutions have started incentivising their customers’ spend with their credit cards, netbanking and mobile services.
While such rewards and loyalty programs help ventures to strive in a highly competitive landscape, it becomes important to understand the underlying costs of such programs and look at some alternatives for a sustainable growth.
Driving a company from 0 to $1 billion definitely needs innovation and disruptive thinking. But what else distinguishes it from 70% startups that fail in the market? These successful ventures focus on a consumer-led business model. Grab, Flipkart, Uber, Airbnb attempt to bring a change in consumer habits.
A major driver of changing habits is motivation. Theories of motivation in psychological sciences distinguish between intrinsic and extrinsic motivation. As the name suggests, intrinsic motivation is driven by internal or personal factors. Behaviors driven by this type do not need external drivers like rewards and incentives. On the other hand, extrinsic motivation comes from factors in the external environment. In simpler words, it means that you do a required action and you’ll get a contingent reward in return. The probability of a consumer adopting a particular behavior is determined on their cost-reward analysis. A user is more likely to engage in a behavior when the cost is low and the reinforcement value is high.
Reward and loyalty systems designed and implemented by companies target this underlying aspect of human behavior. These programs create a sense of value in new or existing consumers for either trying a new product/service or continuing to use it. These rewards aid in customer acquisition and then in building brand loyalty. Companies like Grab and Paytm offering extensive cashback and promotional deals have not only gained widespread popularity in the marketplace, but also raised their valuation over time to be included in the unicorn team.
Why would a company strive for customer loyalty? It can simply focus on customer acquisition and let new users try its products and services without a long lasting relationship. Increasing customer retention by 5% can increase profitability by 25-95% as loyal customers spend 67% more than new customers.
But where do reward programs come in the picture of building loyalty? Credit Suisse began the Bonviva Rewards Shop. Under this program, it welcomes new users with welcome points, offers 1,000 points for newsletter signups, and provides points for every purchase users make using their credit card. The collection points are contingent on the service package a user opts for; the more expensive the package, the more points they receive for their purchase. And, having a higher status gives users a privilege to select from a wider range of items for redeeming their reward points. This program possesses the ability to reward as well as incentivise customers for continued association with the company. Moreover, customers who redeem rewards are more loyal and highly valuable to the financial institutions. A report by Mastercard suggested that redeemers spend three times more than non-redeemers on their credit cards. They also keep their cards for a longer term than non-redeemers.
Theoretically, rewards help in building customer loyalty which later brings about profitability for the venture. However, many reward programs in practice are poorly designed and implemented for short-term goals. And, as a company grows in size and complexity, it becomes difficult for them to segregate their users and allot rewards accordingly. As a result, the company treats all customers equally, causing an over-satisfaction of less-profitable customers and under-satisfaction of loyal customers. The consequence of this is loyal customers with high expectations defect and less desirable ones get the rewards while the company's profit dilutes.
Driven by ferocious competition in the marketplace, many companies commit the mistake of launching reward programs without evaluating sustainable growth and a healthy profit and loss ratio. The costs of such programs become huge and their profits delusory. Let’s look at some examples. Citibank’s credit card reward is built upon cashbacks, discounts and points system.According to its 2021 annual report, it spent 59% of its Global Cards revenue for providing card rewards to drive user engagement. American Express spent $11 billion on its reward gateways last year .
High costs not only happen on banks. Grab, a winner story, paid its customers $1.58 for $1 of platform revenue. Grab has raised $15 billion in funding and demonstrated an impressive growth curve to the world. But underlying this growth is its services fuelled by rewards and incentives. What will happen when Grab stops its reward programs? Will customers continue using it? Or will they switch to another Grab-like superapp who drives user adoption by sacrificing its profitability?
This focus on growth and customer acquisition has distracted unicorns, superapps, the banking sector alike. Some banks hide these costs in their annual reports and some merge it with their marketing spend. See the table below for the cost of rewards as a share of their total revenue for four dominant capital ventures.
Fintechs, supperapps, and e-commerce companies are becoming addicted to cashbacks for driving platform adoption. Swimming in capital investments, they use cashbacks and promotional discounts to inflate their platform usage metrics. Based on this, they are able to successfully raise investments, round after round, from venture capitals’ pockets.
The costly rewards programs are a ticking time bomb. As change is the only constant thing, there is a movement from customer acquisition to profitability.
A constant lure of cashbacks and merchant-funded offers has created an unstated expectation among consumers. Now, any moves by FinTechs and superapps to wind down these offers could impose a threat on their market share. To address this problem, let’s look at how we can revamp the reward program to maximize returns.
Merchant incentive programs provide an alternative to company-funded offers. Financial institutions and superapps need to build a working relationship with merchants, wherein these institutions provide a platform to merchants for brand visibility and the merchants themselves offer discounts, cashbacks or rewards to the users. This symbiotic relationship lets financial institutions increase their reward offers without bearing the complete costs. For example, to power its loyalty program, Visa and Singapore telecom company M1 have partnered with Pulse iD to list their merchant cashback programs including merchants like Nike, Adidas, KFC, Zalora and Watsons on their platforms.
Merchant-funded rewards promote platform loyalty. It enhances user experience by providing immediate user gratification. It encourages consumers to stick to the platform for redemption and future deals. These reward programs also possess the ability to push forward slow moving products and services, and motivate the customers to try things they wouldn’t have done otherwise.
Antavo’s Global Customer Loyalty Report 2022 suggests that 56.2% of the loyalty program owners in Europe are satisfied with their reward programs but only 42.4% of the companies report their satisfaction in the Asia-Pacific region. Further, APAC falls behind Europe in ROI of their reward programs. One possible reason for superior satisfaction scores in Europe is that it engages users outside the buying cycle.
Customer participation and brand experience can be improved with gamification by increasing digital engagement and sharing on social media platforms. It allows creating a balance in loyalty programs. If customers enroll in a loyalty program for the new-user benefits, it can lead to huge losses for the company. It has to bear the cost of customer acquisition while failing to convert them into loyal and profit-driving users. And so would generous loyalty programs. A well-planned gamified loyalty program would drive more and more customers to participate without always getting a tangible reward. On their 50th anniversary, Starbucks launched the Starland campaign which provided an interactive gateway to users for earning points, free beverages and gift certificates.
Gamifying makes customers feel satisfied without costing companies much. Consumer psychology posits that gamification releases dopamine and endorphins, promotes reward-seeking behavior among users, builds a desire to monitor their progress while aiming for their next achievement, and helps in habit building. A survey report published by Reflect Digital showed that 91% of respondents would willingly play games with brands, 84% of them would make a purchase when they come with a positive gamification experience with that brand, and 61% would make repeat purchases from that brand. The biggest ROI of such programs is increased loyalty and increased revenue, companies using gamification are 7 times more profitable than their competitors.
A customer who orders repeatedly is equally important as a customer who writes a favorable review about your brand and recommends it to their friends personally or via social media. But with our existing techniques of data analysis to reward a customer, we end up valuing the former and miss out on the latter.
The convention of tracking transaction information like purchase frequency to revamp loyalty programs is just a tip of the iceberg. Understanding your customers with additional research on the current loyalty landscape will help you shape your loyalty program using a data-driven approach. Demographic details with a rich qualitative and qualitative behavioral and emotional data can help you understand who your customers are, what their needs are, what drives their purchase behavior, and what types of rewards they prefer. Feedback, exit interviews, and capturing customer satisfaction could be some measures of emotional data.
Huggies, a leading diaper brand, rewards customers for not only purchasing its products repeatedly but also for engaging with the brand. By asking customers to upload the receipts on its mobile app in exchange of reward points, it extracts the relevant data points and segments them into VIP customers, frequent customers, infrequent customers and lapsed customers. This enables them to build a strong relationship with their VIP customers, while incentivising other segments to move up this chain. These measurement techniques empower you to construct customer segments and user personas, and personalize the rewards within your loyalty landscape.
A secret behind a successful campaign is understanding that no two customers are the same. So, it becomes imperative to use a data-driven approach to send the right messages and rewards to the right customers at the right time. A simple notification saying “We haven’t seen you for a while. Visit us this weekend, and the coffee will be on us” can lure a lapsed customer.
Recognition of customer milestones is another way to demonstrate a brand’s personalized vision and foster an emotional bond. Saying, “This is your ninth coffee with us, enjoy your tenth one free” or “We’ve been connected for a year now, let’s celebrate this with a 50% discount on your next purchase” will make a user feel valued while encouraging future visits at the same time. These can be achieved by empowering merchants and financial institutions to leverage users’ transaction history for customizing rewards.
Localisation can make your program transition from personalisation to hyper-personalisation. How excited a coffee-lover can get when you surprise them with an offer of Starbucks New York outlet on his trip there! Displaying a set of offers for outlets in Kuala Lumpur is irrelevant for residents of Penang! By localisation of rewards and offers, you can attract local customers and hype local businesses, leading to a successful reward campaign.
Moreover, rewards can be differentiated for different user segments. For example, new users can be rewarded with 500 points for their first purchase and an existing user can be rewarded with a 50% discount on their tenth purchase. This would enable the companies to achieve a higher revenue by increasing the relevancy of rewards and reducing the cost associated with reward cannibalisation. Brands which provide personalized experiences gain 6-10% increase in revenue. Companies like Pulse iD can help you offer hyper-personalized services to your consumers with their latest data-driven methods and advanced tagging techniques.
Two companies need not always compete with each other. A coalition or a strategic partnership to build an umbrella loyalty program where businesses have a common customer database might be a win-win opportunity for both. It provides opportunities for broader customer data, cross-marketing, and IT platform sharing.
Companies can also combine products and services with rich content to create their brand ecosystem. Amazon Prime is a leading example of a connected loyalty ecosystem with its additional offerings including Prime Video, Prime Music, Whole Foods and many more.
An umbrella loyalty program must focus on shared consumers, brand synergy, diversity of products and services, seamless experience, alignment on government processes, and technical connectivity. A flourishing ecosystem loyalty program is profit-driving for all parties as brands gain in visibility and purchase frequency. Customer-centric ecosystems can withstand today’s competitive spirit.
With constantly changing times and markets, the end goal for companies must also change from getting higher valuation from the next investment round to creating customer stickiness and a profitable venture. Post-pandemic consumers are excellent surfers, they navigate channels and devices before purchasing any product or service to avail the best deal in the marketplace. Companies need to up their game. A complete redesign of loyalty and reward programs with embedded metrics and analytics for driving highly personalized, extremely relevant, and super dynamic user experiences is the key to drive experiential programs.