The term “incentive” is being used more and more in spaces like e-commerce, healthcare, and policy. But what do marketers really mean when they talk about incentives, and how can you apply the idea? Today, we’ll demystify the term, talk about how understanding incentives can help you design a more effective rewards program, and give you some actionable ways to get started with this.
But first: a little background. As we’ve discussed in previous blog posts, rewards programs can create significant value for both you and your customers. This is because such programs give shoppers the ability to work toward rewards while they also generate loyalty and engagement for your brand. However, to break down exactly how rewards programs affect consumer behavior, we need to take a closer look at the process of decision-making. This is where the concept of incentives really becomes important.
Let’s start simple. We know intuitively that providing additional incentives for certain actions increases customers’ willingness to take those actions. For example, when a company begins offering reward points for sharing their website on Facebook, they’ll probably see a significant increase in this activity. But how can we understand this phenomenon more deeply?
Well, incentives and rewards play an important role in decision-making. As it turns out, the process of decision-making can be modeled with what's called cost-benefit analysis. Cost-benefit analysis involves weighing an action's benefits against its costs, and it makes sense that a customer's brain engages in this sort of comparison before the customer takes any action. For example, a shopper will elect to share your website on Facebook if the benefits (i.e. monetary rewards or association with a well-perceived brand) outweigh the costs (i.e. effort requirements or fear of social judgment). However, if the costs are perceived to be greater than the benefits, the shopper will choose not to share your website. An incentive is essentially anything that tips the balance in favor of “benefits” for a given action. Therefore, incentive marketing programs work because rewarding specific actions (such as purchasing, sharing, or referring) adds to the benefit of these actions.
So, what does all of this mean for you? It means that it’s important to maximize the value that your rewards offer customers. After all, as we’ve just established, more valuable rewards = more valuable benefits = stronger incentives. And stronger incentives mean more customer engagement and loyalty.
Here’s the kicker, though: offering more money isn’t the only way to increase reward value. This is because the “benefits” and “costs” of an action can include anything from its emotional impact to its time requirements. Plus, the value that a reward has for someone depends on various contextual factors (even if the reward is purely monetary).
If you’re a little skeptical, that’s ok -- let’s take a closer look at some specific tactics.
Tactic #1: Give customers points just for creating an account.
Rewarding shoppers for entering their email information and creating an account serves a number of brand loyalty purposes. In encouraging account creation, it decreases checkout friction on future orders. It also gives you an email address with which to nurture this particular relationship. And, perhaps most importantly for this post, it makes future reward points more valuable to the customer.
Wait a second -- it does what? Well, before we get too specific, let’s talk quickly about something called “loss aversion”. Loss aversion refers to the almost universal human tendency to be more sensitive to losses than to gains. Put differently: people would prefer to not lose $20 than to gain $20.
Therefore, once a customer has earned any number of reward points, they become quite averse to losing these points. Because never earning enough points to redeem a reward essentially forfeits (loses!) these points, the customer begins to consider “not needing to forfeit points” a benefit of continuing to earn. This tips the decision-making scales toward sharing, purchasing, and referring. To put it more simply: giving shoppers their first points incentivizes them to earn more points, and so the strength of your incentives has increased.
Heart Rate Monitors USA provides a straightforward example of this. Their site emphasizes that customers receive 25 points just for creating an account. Notably, these 25 points are equivalent to only $1.25 in eventual discounts, which goes to show that the reward you offer doesn’t actually need to be particularly large.
However, it’s important to note here that starting users off with enough points to a) redeem their first discount, and b) purchase an item entirely with that discount may leave your site vulnerable to fraud. This is because hackers can create an account, redeem a discount using only the points they earn from doing so, and then purchase an inexpensive item -- all without actually spending money (and they’ll probably repeat this process with the help of a computer program). Keep an eye out for enabling these types of situations.
Tactic #2: Make your rewards attainable.
You've probably heard this suggested before, and here's why: if your most attainable reward costs a huge number of points, you’re probably weakening your program’s incentives on the whole. Why is this?
Here's one reason: in a process called “temporal discounting”, people significantly discount the value of things they won’t receive any time soon. Therefore, if shoppers think it will be years before they can earn their first reward, the effective value of the reward today decreases. As we know, less valuable rewards mean weaker incentives.
To avoid this, you can offer rewards that are accessible in the short-term by offering at least one or two low-value rewards. For example, if you’re currently offering $10 off for 1000 points, consider also offering $5 off for 500 points (like Meshki Boutique is doing). Your overall points-to-dollars ratio won’t change, but your set of rewards will effectively increase in value. This is pretty incredible, so we’ll say it again: without offering more points or dollars-per-point, you can make your incentives stronger. Neat, huh?
Tactic #3: Offer program-exclusive, non-monetary rewards.
If you're still looking for ways to add value to your rewards without investing more money into your program, consider this: consumer and social psychologists have noted that people highly value exclusivity (so long as it isn’t perceived as elitist). For example, a new app feature that is available only to randomly-selected users is probably more coveted than the same feature when it becomes available to everyone. Perhaps this is because setting barriers to attaining an item signals that the item is in some way special; or perhaps it is because people often want what they (and others) can’t easily have.
Either way, the point is this: exclusivity actually makes items more valuable.
Applying this principle can be as simple as designing merchandise (from hats to bags to stickers) that cannot be obtained outside of the rewards program. While this merchandise may be inexpensive to manufacture, it’s still likely to be highly valued by consumers. And get this: program-exclusive rewards don’t even need to be physical. For example, consider the incentive of status. The Elephant Pants rewards loyal customers with VIP memberships, and their customers probably value this membership for more than simply its point multipliers.
Another benefit that can’t be obtained outside of your rewards program is inclusion in your community. By emphasizing the communal aspect of your program, you ensure that reward members feel inclusion and connection every time they shop with you. While this sort of incentive isn’t tangible, it can be powerful. To this end, Allies of Skin has created a rewards program called “Allies Underground”, whose members must sign in with a “secret handshake”. Membership in this underground-society-of-sorts creates the alluring feeling of belonging to something unique.
Norsu Interiors has taken a slightly different approach to this same idea. They’ve named their rewards program the “Norsu Tribe” and built it around expressions of respect and togetherness. They also urge their customers to “join the tribe” instead of to “create an account”.
Even while neither of these programs are actually exclusionary (anyone with an email address can sign up), both brands do a successful job creating a sense of ingroup inclusion that can’t be obtained simply by shopping the site. In this way, they provide customers with additional value every time they choose to engage with the program, ultimately making the program more engaging.
Putting It All Together
In a nutshell, the goal is to add value to the rewards offered by your program, as this is beneficial for both you and your shoppers. The real challenge is doing so without simply upping the monetary value of these rewards. After all, too-costly incentives will decrease your ROI.
The tactics that we’ve outlined here -- rewarding account creation, making rewards attainable, and offering exclusive rewards -- are just a few ways to increase incentive strength with minimal monetary investment. But whether you choose to implement our recommendations or develop tactics of your own, remember this: your rewards are worth much more than just their dollar value.