Personal finance: pledging your loyalty to the real rewards - lessons drawn from loyalty programs
As we start the new year, we’re resetting the counters on a many number of things, including our loyalty cards. An interesting parallel can be drawn between this specific type of programme and certain aspects of our personal finances.
Loyalty programme points... as raised by researchers
There is a relatively high volume of research-based literature on the psychological effects of loyalty cards. One study, published in February 2006(1), focuses on rewards cards for free coffee. The authors demonstrate that as consumers get closer to earning their free coffee (after 10 visits), their visits become more frequent. They also highlight that is not a question of habit: when given a second loyalty card from the same franchise, a customer will go back to their initial pace of purchasing, and again accelerate their purchases as they approach the reward.
Loyalty programmes also successfully play on the illusory shortening of distance to the goal. A 12-stamp card with two “welcome” stamps (instead of a 10-stamp card to be stamped with each visit) increases engagement in the loyalty programme. As the study shows, customers that have a card with two pre-stamped boxes make their purchases 20% faster to complete their card.
There has also been research on other discount-related psychological effects. For example, it has been proven that we prefer smaller but consistent discounts (less 5% at each check-out)(2), rather than one bigger discount once loyalty has been verified. Indeed, according to the American annual Loyalty Barometer(3) one of the biggest pain points of loyalty programmes — by far — is rewards that take too long to earn (almost double the votes of the second identified pain point). This preference for immediate gratification was brought to light in 1970 by two researchers at Stanford University(4). In their “Marshmallows” experiment, children were given the choice of having a few treats right away, or waiting 15 minutes, the treats in plain sight, to have twice as many treats. Numbers aside, the general conclusion was that rather than the prospect of more treats, it was by distracting themselves from the immediate reward by playing, singing — and even sleeping! — that made it easier for the children to wait.
Four recommendations for the price of three!
The research on loyalty programmes is interesting in that it changes our perception of the benefits of a purchase and what truly constitutes a “good deal”. In finance, other than factoring in the risk/reward ratio, part of our decisions are in fact influenced by our perception ; our perception of the risk, of the reward, and the relationship between the two.
How can we use loyalty programmes as inspiration for better managing our finances?
- Firstly, while habit has a number of virtues, such as investing in the products and solutions we are already familiar with, we should challenge ourselves on a regular basis in order to break any potentially unsuitable habits. Numerous factors (our personal situation, the macro-economic environment, etc.) could make changing our practices (geographic diversification, interest in different products, etc.) worthwhile — provided it is consistent with our investor profile.
- Secondly, as the research shows, it makes more sense to set achievable, short-term goals in which we can invest more energy, and be incentivised to reach them. To give you an idea, rather than changing your entire wealth allocation, you could reallocate part of your portfolio now for a limited period of time, or open a savings or investment programme.
- Thirdly, the extent of the progress illusion that loyalty programmes create is a reminder to not fall for presentation (or the “framing”), and instead focus on the substance. This requires examining how the elements are presented before making any financial decisions.
- And, as promised, the fourth recommendation: engagement. Just as we care about the status we reach with certain loyalty programmes, and belonging to elitist clubs (Gold, Executive, etc.), we can experience the same sense of same engagement when investing our efforts into making decisions. And if you feel a decision no longer fits the bill, you are free to backtrack, despite the time spent making that decision.
Thank you, loyal readers! No cards needed here. See you in a few weeks for the next article!
(1) “The Goal-Gradient Hypothesis Resurrected: Purchase Acceleration, Illusionary Goal Progress, and Customer Retention”, Kivetz, Ran, Oleg Urminsky, and Yuhuang Zheng. Journal of Marketing Research 43, no. 1: 39-58, 2006.
(2) “Attention in delay of gratification”, Walter Mischel and Ebbe B. Ebbesen (Stanford University), Journal of Personality and Social Psychology, Vol. 16, Iss: 2, 1970.
Further reading: “When it comes to loyalty programs, customers want immediate benefits and they’re willing to pay”, Tom Caporaso, September 2021.
(3) “Loyalty Barometer Report”, published by Merkle/Dentsu, 2022
(4) “Attention in delay of gratification”, ibid.
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