Rewarding Profitable Behavior

  |  August 12, 2005   |  Comments

By rewarding the right behavior changes, you can breed more profitable customers.

We've talked a lot about customer loyalty and retention strategies over the last few months. We focused on understanding how various reward programs work, but we haven't discussed what we should reward.

Should we reward users for purchases (with points or free shipping), or are there smarter ways to structure a reward programs? If rewards train our users to act a certain way (to get rewards), are we training them to be more or less profitable?

Training users to only shop when you have a discount leads to less-profitable users. Training them to expect free shipping all the time almost guarantees they'll look elsewhere once you stop offering it. There must be a better way to structure rewards to actually breed profitable customers.

Rewarding Better Behavior

Many online companies structure free-shipping promotions to require a minimum purchase amount. This accomplishes two goals: it stops the free-shipping promotion from occurring with every purchase, and it modifies user behavior. Smart companies set this minimum purchase to be higher than their average order amount. This technique attempts to coerce customers into the next bucket of customer segmentation: more profitable customers.

This is one of several techniques that push users into being more profitable. The hope is these customers' behaviors will be altered forever, and they will routinely buy more, even when not rewarded to do so.

But this coercion treats the symptom, not the cause. These people aren't in the "low order amount" segment because they've been waiting for a reward that will entice them to buy more. They're in that segment for other reasons: They don't know the full breadth of your product offerings. They don't feel the site's user experience is personalized enough. Or, they don't feel an emotional connection with your brand and use you only for price comparison.

Understanding why these users don't shop more frequently (or spend a lot of money) will help you structure a better reward program or promotion. For instance, many companies we work with have a multicategory problem. Customers use the site to buy jewelry but not clothes; electronics but not books. For some reason, these customers don't think of the company's brand for these other items and instead shop at competitors' sites.

Multichannel customers are more profitable than single-channel customers. Customers who use your Web site in addition to your store or catalog are more profitable than Web- or store-only customers. Instead of rewarding single-category shoppers based on purchases, reward them for discovering new categories. Try offering free shipping to single-category shoppers if they purchase an item from a different category.

EBay did this with its "Camp eBay" promotion. It awards merit badges based on various activities users perform on the site. The badges aren't based on simple purchases. They're based on how purchases are made and what's purchased. Merit-badge-worthy behaviors include using the "Buy It Now" button instead of bidding on an item, shopping in several different product categories, and posting feedback.

By rewarding users based on behavioral changes, eBay hoped to accomplish several goals. It educated users about new or misunderstood features, such as the "Buy It Now" button. It encouraged more profitable multicategory behavior and extended its brand into product categories some customers don't associate with eBay. It trained users to be a better community by rewarding them for submitting feedback and performing other good-neighbor tasks.

Your company can do this, too. Rather than a simple points-based reward program, offer promotions based on customer behavior. eBay's promotion ended a while ago, but users who shopped for electronics for the first time because of the multicategory promotion now think of eBay for electronics, not just for antique cameras.

If you couple these types of rewards with better onsite features, such as cross-category promotions and personalized product promotions, you treat the cause of the problem, not just the symptom. This is a far more effective way to reward someone than simply saying "Buy more and you'll get free shipping." That reward certainly works, but it doesn't affect user behavior beyond the promotion itself. It doesn't get to the actual reason these users aren't more profitable.

Does your company offer behavior-based promotions or loyalty programs? Let me know how effective they are.

Until next time...


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Jack Aaronson

Jack Aaronson, CEO of The Aaronson Group and corporate lecturer, is a sought-after expert on enhanced user experiences, customer conversion, retention, and loyalty. If only a small percentage of people who arrive at your home page transact with your company (and even fewer return to transact again), Jack and his company can help. He also publishes a newsletter about multichannel marketing, personalization, user experience, and other related issues. He has keynoted most major marketing conferences around the world and regularly speaks at and other major industry shows. You can learn more about Jack through his LinkedIn profile.

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