Nearly
as long as there have been coffee shops and carwashes, all manner of
businesses have handed out buy-10-get-one-free punch cards and hoped to
reap the rewards of this simplest of loyalty marketing campaigns. But a
new day is dawning.
Smartphones
and loyalty apps have begun offering small businesses enhanced program
features and automated administration capabilities once affordable only
to large companies like airlines and hotel chains. These capabilities
also offer the equivalent of a real-world psychology lab for easily
evaluating the effects of offerings and incentives on customer loyalty.
“All
organisms, in different ways, are drawn to goals,” said Oleg Urminsky,
who teaches marketing research at the University of Chicago Booth School
of Business. “The closer we are to achieving our goals, the more
motivated we are to keep doing something. As mice on a runway get closer
to a food pellet, they run faster.” Similarly, he said, “as people get
closer to having a completed card, the time between visits gets
smaller.”
Studies
have also shown the psychological benefit of preloading a frequent
buyer card with a couple of punches to make the dangled reward appear
closer. A carwash that started one set of customers with a
buy-eight-get-one-free card and a second set of customers with a 10-wash
card already punched twice, found a few months later that nearly twice
as many people (34 percent) given the illusion of a head start toward
the same goal had redeemed the card as people (19 percent) who had to
earn their first punch. Two researchers, Joseph Nunes and Xavier Drèze,
have called this the endowed progress effect.
Though
useful, punch cards have shortcomings. For one thing, they’re no good
if left behind on the refrigerator or misplaced. Do some cashiers
triple-punch the cards of friends? Sure. Moreover, the motivating
effects tend to fade, said Dylan Bolden, a partner at the Boston
Consulting Group and co-author of a study last year called “Leveraging
the Loyalty Margin: Rewards Programs That Work.”
“If
that’s the only thing you do, the punch card becomes more of a price
promotion than a loyalty program,” Mr. Bolden said. In essence, the
punch card is primitive compared with dynamic, app-powered loyalty
programs.
Capriotti’s,
a 106-store chain of sandwich shops in 16 states, expects to introduce
an app-based loyalty program early this year that its chief marketing
officer, Jason Smylie, says will enable shop owners to enrich and
fine-tune a prior punch card rewards program. “In addition to
buy-10-get-the-11th free, we’ll have a points-based program where
customers earn points and status per dollar spent,” said Mr. Smylie,
explaining that rewards will rise with increasing status and core
customers “will also get surprise-and-delight offers.”
The
software, developed by the company Punchh, will enable Capriotti’s to
award a free drink or a dessert — as an unexpected reward at the cash
register — to highly valued customers on perhaps 20 percent of their
visits. “You’re not only rewarding the customers who are coming more
frequently, you’re also giving people an incentive to show up,” he said.
“I can come in and potentially get something for free. That’s awesome.”
And
effective. Psychologists have a name for this kind of reward — random
intermittent reinforcement — and know it as a powerful way to encourage
repeat behavior. Think no further than slot machines. Casinos have
zeroed in on the gambling habits of their patrons through the use of
smart cards rather than coins. Retailers can also now better know their
customers through loyalty apps, which may also use data from Facebook
profiles.
“With
apps you now can target specific customers and influence specific
behaviors and keep track of all the results and understand the results,”
Mr. Smylie said. “Because the check-level detail is now tied to a
customer’s profile, we can understand what their purchasing behavior is,
what their interests are and cross-reference that against their social
media profiles and market to them more effectively and involve them at a
deeper level with our brand.”
Jitendra
Gupta, an engineer and entrepreneur with a long background in
customer-relations management software , said he started developing
Punchh in 2010, when “social and mobile were coming together and we
wanted to build a program for restaurants and local businesses to get to
know their customers and bring them back.”
The
goal, he said, was to use social networks to drive word of mouth. If a
visitor to the company’s Facebook page was referred there by a friend,
the friend will be sent a notification saying, “Congrats, you just won
an extra reward for referring your friend.”
Mobile
loyalty apps, Mr. Gupta explained, can also enable small businesses to
run scratch-off sweepstakes programs or more involved games, along the
lines of McDonald’s Monopoly stickers contests, long the province of
Fortune 500 companies. Smartphone screens can also host engaging games —
say, catching falling fruit or objects related to the business — and
award a free menu item for reaching certain achievement levels. When
children win, he said, the entire family may come in to redeem the
reward.
“Clearly,
this is the best of times for loyalty programs,” said Mr. Bolden of the
Boston Consulting Group, who recommended that small businesses “focus
on the non-earn-and-burn aspects of the program.” He suggested that spas
consider a separate waiting room for their app-identified best
customers.
“Or
when the treatment is over, you hand the customer a glass of Champagne
and strawberries,” he added. “If you’re an apparel retailer and you get
in a new line from a new designer, invite the top 5 percent of your
customers in first so they can see it before anyone else.” The point is
that many effective rewards need not cost much to bestow.
Moreover,
smartphones that can pinpoint a user’s location may provide additional
marketing opportunities to people who’ve downloaded loyalty apps. A
mobile technology developed by Apple, iBeacon, allows businesses to know
if a regular customer is near their storefront and ping them — or even
greet them by name as they cross the threshold.
For
Dave & Buster’s, a food and drink establishment for adults built on
games, “staying in the mind-set” of customers can be important, said
Kevin Bachus, senior vice president for game and entertainment strategy.
“We have to be in their decision set when they’re thinking of what to
do tonight or we may miss out.”
Part
of the answer, he said, is mobile apps, but the challenge is figuring
out timing and frequency of messages, and not to overdo it.
“If
you bombard them — say, when they’re on the way to their kid’s school —
with a pop-up that says, ‘I notice you’re within a half mile of a Dave
& Buster’s, come on in,’ that’s going to be aggravating,” he said.
Better to ping New York Giants fans on Sunday, offering half-price beers
to those wearing Giants blue.
Professor
Urminsky of the University of Chicago said a strategy built on mobile
apps to reward loyalty — in essence, “a loyalty platform rather than an
isolated loyalty program” — opens new possibilities for small
businesses. “If it’s used wisely,” he said, “I think it will be a game
changer.”
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