Using Smartphones and Apps to Enhance Loyalty Programs

By John Grossmann

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 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.”

Mobile loyalty apps 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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