Incentives are a fundamental component of consumer behavior change. The type, value and delivery of that incentive greatly affects how receptive consumers will be to taking the desired action. In recent years, loyalty programs have been focusing on providing everyday rewards as an incentive, with a particular focus on cash back and basic consumer needs.
While this approach has proven successful, especially in the current economic climate, a program runs the risk of limiting its efficacy and desirability by straying from aspirational rewards that convey something special and luxurious, an experience or asset beyond their everyday needs — the essence of a true ‘reward’. Something that you don’t get every day. Something amazing.
In this article, I explore scenarios in which aspirational luxury rewards are an effective incentive in consumer loyalty programs. The article is primarily based on research examining effort as a determinant of customer preferences and the theory of pre-commitment to indulgence. 1
Before digging into the research, it will be helpful to define a few key terms:
- Luxury – Goods or services that are not necessary, but tend to make life more pleasant for the consumer.
Necessity – Goods or services that are considered indispensable for maintaining a certain minimum standard of living.
Effort – Any inconvenience associated with earning a reward.
The well-documented research of Kivetz and Simonson leads one to believe that there are three main determinants indicating whether a luxury reward will be effective and desirable to your audience.
- Consumer Psychographics – If your consumers tend to feel guilty about luxury consumption, then they are more likely to have a preference for luxury rewards in a loyalty program. Supporting theory: Loyalty programs offer these consumers an opportunity to earn the right to indulge in a reward that they would not normally purchase for themselves.
Program Requirements – The higher the required effort to earn a reward, the more likely the consumer is to prefer a luxury reward. Further to this, consumers are more likely to prefer luxury rewards if they perceive the effort they are expending to be work as opposed to pleasure. Supporting Theory: This theory is also directly related to a consumer’s guilt associated with luxury consumption. The higher the effort and the closer it resembles traditional work, the easier it is for a consumer to justify selecting a luxury reward. This rationalization, whether intentional or not, reduces the ‘luxury guilt’ that the consumer would normally feel.
Reward Mechanics – Consumers that are required to pre-select a reward before expending the effort required in earning it are more likely to prefer luxury rewards. This effect is magnified when the decision is a low probability event, such as a lottery or sweepstakes. Supporting Theories: Some consumers recognize their attraction to necessities and tendency to deprive themselves of luxury rewards. By pre-selecting a luxury reward they are locking themselves into a reward that they want but know they are unlikely to choose at the time of redemption.
While the hypothesis that low probability events predispose a consumer to luxury rewards has been tested and supported by a number of researchers 2, their explanations differ. That said, I think it’s fair to assume that there are at least two factors at play; the decreased probability of the outcome makes it easier to justify selecting a luxury reward and luxury rewards have a close alignment with the fantasy and fun elements associated with expending effort towards a low probability outcome.
In most scenarios, rewards focused on cash back and consumer needs will be more popular than luxury rewards. With that said, programs may be missing out on a sizable portion of their addressable market by not offering aspirational luxury rewards.
Listening to your audience, testing a variety of scenarios and monitoring actual consumer behavior will be the best indicator of future reward performance and consumer engagement. In the stead of direct consumer trials, economic theory can be used to predict how your consumers will behave.
The research of Kivetz and Simonson 3 has provided a few guidelines to predict if your audience will be predisposed to aspirational luxury rewards. The most influential indictor is your customer’s propensity to feel guilt during luxury consumption. The more ‘luxury guilt’ that they have, the more likely they are to prefer luxury rewards.
This tendency will be amplified if:
- There are high program requirements, in terms of effort expended
The effort is considered by the consumer to be work as opposed to pleasure
The consumer is asked to pre-select a reward before earning it
There is an element of chance associated with earning the reward
If some or all of these indicators are characteristic of your program, it may be beneficial to start testing luxury rewards within your loyalty program. Below is a handy reference that summarizes the indicators that determine whether a consumer is pre-disposed to luxury vs. necessity rewards.
Kivetz, Ran and Itamar Simonson (2002), “Self-Control for the Righteous: Toward a Theory of Precommitment to Indulgence,” Journal of Marketing Research, 29 (September), 199–215.↩
O’Curry, Suzanne and Michal Strahilevitz (2001), “Probability and Mode of Acquisition Effects on Choices between Hedonic and Utilitarian Options,” Marketing Letters, 12 (1), 37–49
Rottenstreich, Yuval and Christopher K. Hsee (2001), “Money, Kisses, and Electric Shocks: On the Affective Psychology of Risk,” Psychological Science, 12 (3), 185–190.↩
Kivetz, Ran and Itamar Simonson (2002), “Earning the Right to Indulge: Effort as a Determinant of Customer Preferences towards Frequency Program Rewards,” Journal of Marketing Research, 39 (May), 155–170.↩