Reward Management as a Part of Bonus Programs in B2C Markets

MA-Thesis / Master von Sebastian Grosser

Abstract:

At the moment bonus programs are – alone or in combination with other instruments - one of the most successful and most often used marketing instruments in B2C markets, to retain customers by giving them a bonus for loyal behaviour. A typical bonus program of this kind is Payback. The problem is that still there is little known about why customers participate in bonus programs and that especially the crucial aspect rewards management (also bonus management) is the blind spot of the marketing theory on hand. On the background of high investments in bonus programs and their rewards on the one hand and unclear reasons for the different success of bonus sets on the other hand this is an unsatisfactory situation.

The target is therefore to show how bonus programs work and how rewards management is integrated in such a bonus program. Furthermore it is the target to show how rewards management can contribute to program success, how a rewards concept has to be set up and which possibilities (e.g. type of reward) there are for setting up a successful bonus set.

To reach this a compilation of the scattered but carefully selected information in marking literature, papers, articles and further sources also from non-economic ones like psychology, a systematization of the findings and drawing of conclusions from this gives a clearer picture and helps to give recommendations for setting up a successful rewards management. For backing up the findings the results of an especially therefore carried out online survey get used.

The decision to start with a bonus program must be based on the likeliness of the expected benefits that can be higher perceived product value, customer satisfaction, loyalty, from that customer equity and company value and cost savings as well as additional sales and cross and up-selling. Of course these benefits are strongly influenced by the customer retention potential of the bonus program set-up. The customer retention can be influenced through bonus programs by both psychological causes (e.g. satisfaction) as well as by rewarding the customer for certain behaviour. Because everybody can reward the customers the type of bonus / reward is decisive. The type of reward belongs to the burning mechanism of a bonus program. In a token economy rewards can be redeemed for collected points (artificial currency). Points and point issuance rules are part of the earning mechanism and are closely linked.

The rewards are the reason why customers enter and interact with a bonus program. When rewarding is a direct consequence of a specific behaviour it increases this behaviour. To attain a reward a customer has therefore to invest a strain of efforts that needs to be defined. The defined effort (e.g. purchasing) must have the potential to become an internalized behaviour of the customer.

Possible reward types are cash or cash equivalents, product rewards and rewards from the area of fun an entertainment, extra services, which should refer to the core product or service of the company but creates high organisational costs, status or the participation in auctions. The most important criterion is the target group of the bonus program. The next criterion to select the right rewards is the effort to participate. Findings are that people tend to maximize the frequency of rewarding and not the magnitude and that the interest in a bonus program will drop if a customer gets no reward after 9 – 12 months. The higher the needed effort the more luxury rewards will be redeemed. The use of additional payment, part payment or self liquidating offers will have an influence on the success of rewards as well. The higher the monetary costs for the customer the lower is the preference for luxuries. Offering part payment can reduce frustration that can be the result from high requested effort but should always be used tiered and discreet. A totally free combination of additional payment and points would destroy the motivational factor and should not be allowed.

Rewards must be attractive and relevant. The perceived value of the rewards should be high and to reduce program cost it should be higher than the real value which especially makes cash as a reward less interesting for a company. In this context it is important to say that it is better to hide the real value of the points. Different rewards have different effect on customer retention which should be an important factor in the rewards selection. Rewards related costs (especially logistics) should also always be part of the rewards decision. It is not advisable to get in open rewards competition with competing bonus programs because this results in higher program costs. It is better to offer not easy to compare rewards or to focus on other rewards types than the competition. Furthermore the industry of the company that runs the bonus program is important for the rewards selection. Limitation factors that can be for example a result from a participation in a multi partner scheme should be addressed.

Besides these criteria and the characteristics of the different rewards also some further rules need to be followed. The higher the congruity between the effort and the reward the lower is the risk of promotion reactance. On top rewards should in the best case support the products or services of a company. Furthermore the rewards fungibility should be optimal adjusted. On top it is important to note that rewards loose their value to motivate over time. Therefore the rewards offer should change from time to time.

The process of sourcing the rewards should be set-up individually according to the bonus program needs. A possible outsourcing of this function should under no circumstances only be decided under cost efficiency aspects. Especially for programs with only few rewards or that make use of own (which are internally sourced) rewards the rewards management should not be outsourced. The use of outside rewards and licensing as well as vertical and horizontal cooperation could raise the attractiveness of the bonus set and can be used to reduce the reward costs.

Key learnings from the market research are that 70% of the market research participants say that they participate in bonus programs and 50% of this 70% said that they changed their shopping behaviour in favour of the participating stores. 89,2% of this customers expect attractive rewards. 91,9% already redeemed a reward in a bonus program. Customers that collect with a specific target tend to be more loyal than customers that collect without a specific target. Targeted collecting should therefore be promoted. After cash, product rewards are highly attractive. Men can be especially attracted by status. The physical catalogue as a channel to offer rewards becomes less important. Additional payments are widely accepted.

Overall the result of this thesis is that rewards management is indeed the crucial point for successful bonus programs but that rewards management is also strongly linked to other aspect of the bonus programs like the points issuance rule that set the frame for the rewards management. Therefore the recommendations are that already in the program set-up phase the rewards management should be a strategic and program defining element and not just a function that converts the strategy into a bonus set and the findings and tools given in this thesis should be used to set up an individual bonus set. Further research on this topic is recommended as well.

Table of Contents: