Do Business Well

Imagine that you’re walking down a city street when a complete stranger suddenly approaches you. He tells you he’s just been transferred to a new position in Atlanta and has to move that weekend and asks if you’d be willing to help him load some boxes onto a truck. If you help him, he says, he’s got a refrigerator full of cold beer that he’ll share. Would you help? Would the incentive be enough? What if he said that he and his wife had planned a trip to Paris that they can’t take because of the move and he’d be willing to give you a pair of airplane tickets?

On the other hand, what if you got a call from a friend who’s making the same move and needs your help? You’d probably do it for nothing. She might give you a bottle of your favorite wine to show her appreciation. It’s not really necessary, but it’s still a nice reward.

Even though incentives and rewards tend to get lumped together, there’s a big difference between the two. Incentives are ways to get people to do things they might not otherwise do. Rewards encourage and reinforce certain behavior. Used indiscriminately, though, rewards can often act like incentives and may even reinforce negative behavior.

Say, for instance, that exactly two weeks before the end of every fiscal quarter a company sends all its existing customers an email thanking them for their loyalty and offering them $10 off any purchase they make during the next week. The company may think it’s rewarding customers, but as a reward this approach doesn’t work. It may, in fact, have the negative effect of training customers to wait until the end of each quarter to make their purchases, knowing that they will receive a discount. A true reward, however, would be something—and it could be different for each customer segment— that’s designed to reinforce certain behaviors. “Buy ten, get one free,” is a reward. See Table 8-5 for a comparison of three different incentive and reward mechanisms and some common applications for each one.

Incentive and rewards programs can be very effective for acquiring new customers as well as for retaining existing ones. Frequent-flyer programs such as American Airlines’ AmericanAdvantage are perhaps the best-known examples and have been tremendously successful. AAdvantage has moved from a simple loyalty program introduced to help American retain its best customers to a lucrative profit center. AAdvantage sells its points so that members can redeem them for all types of rewards, from rental car certificates to hotel vacations. AAdvantage points are even interchangeable with AOL Advantage points and can now be used for collecting rewards on AOL. In other words, they are turning into a currency for online shopping.

Other point programs have been designed with different goals in mind. With its focus on customer acquisition, MyPoints primarily offers companies incentives that they can give to new customers to attract their attention or get them to make a purchase. ClickRewards, on the other hand, gives online buyers the opportunity to collect points on purchases they make from a network of participating merchants building loyalty to the network participants. As we see, sometimes the line between rewards and incentives can get fuzzy.

If a customer gets an increasing number of points with each purchase from the same merchant (100 for the first, 120 for the second, 150 for the third, etc.), the natural inclination will be to keep buying only from that merchant. A well-designed rewards program increases the switching cost of your most loyal and valuable customers and greatly improves your chances of retaining them and of gaining an increased share of their wallet-and mind-share.

Email plays an important part in any loyalty and rewards program. Whether it is reaching out and offering promotional incentives to encourage new customers to make a purchase with you, communicating the status of your members’ balances, or offering special redemptions to members who have reached a certain level, email is a powerful direct marketing tool for every loyalty program.

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