Marketing Researcher Sheds New Light on Rewards Programs

Newswise — Loyalty or rewards programs have become very popular, but little is known about how they affect consumer perceptions after they sign up.

A new study by Rajesh Bagchi, assistant professor of marketing in the Pamplin College of Business at Virginia Tech, sheds new light on these programs, used by airlines, credit-card companies, hotels, retailers, and other businesses to promote customer allegiance.

Bagchi and Xingbo Li, a master’s student in marketing who graduated earlier this year, conducted two lab experiments. In one study, 246 participants earned reward points in a grocery-store loyalty program that could be redeemed for a gas card; in the other, 385 participants accrued points in a restaurant loyalty program through dinner purchases that could be redeemed for a free dinner.

The points earned per dollar and the total points needed to redeem the reward comprise the two key elements of rewards programs, Bagchi said. In addition, the programs are structured in different magnitudes — for example, “earn 10 points per dollar spent, get $6 off when you accumulate 1,000 points” vs. “earn 1 point per dollar spent, get $6 off when you accumulate 100 points.”

Their research, Bagchi said, shows that different magnitudes affect consumer responses in very different ways — even when the same sum — in this case, $100 — has to be spent in order to get the $6 discount.

One of their findings, for example, shows that when the points earned per dollar are not a straightforward single rate, but a complicated range of points, consumers will ignore the complexity to focus on the total number of points needed for the reward.

The result? In a higher-magnitude program, the reward distance somehow feels very large to consumers, Bagchi said, so that those close to getting the reward — those with 800 of the 1,000 required points, for example — feel that they have made much more progress than those with only 200 points. The reverse, he said, is the case in a lower-magnitude program.

Their research, to be published in the February 2011 Journal of Consumer Research, also has important implications in other contexts, Bagchi said. These include weight loss and financial savings goals, where perceptions of progress influence the continued pursuit of the goal.

Learn more at www.pamplin.vt.edu/magazine/fall10/loyaltyprograms.html