In 2006, two consumer researchers named Joseph Nunes and Xavier Dreze conducted an experiment. They partnered up with a local car wash and handed out 300 loyalty cards.
Half of these paper punch cards had eight squares which needed stamping before the customer was eligible for a free car wash. The other 150 cards had 10 squares that needed stamping before the customer received a free car wash, but two squares were already stamped.
What Nunes and Dreze found was that customers with the 10-square loyalty cards were almost twice as likely to earn their eight stamps and redeem their free car wash.
Why was this the case? All 300 customers had to go through the exact same process to redeem their reward – neither group had an advantage over the other.
The reason for the higher redemption rate is those two pre-stamped squares, and it’s called the Endowment Effect.
The Ultimate Guide to Customer Loyalty Programs
Learn how to create a successful loyalty program that retains customers and boosts sales.
What is the Endowment Effect?
The Endowment Effect states that people are more likely to retain an object they own than to acquire that same object when they don’t own it. In other words, people place higher value on something they already have, compared to something they don’t have.
If I have a coffee mug at home, I might not be willing to sell it for anything less than $10. But in a different scenario, offer to sell me that exact same mug and I wouldn’t be willing to pay any more than $5 for it.
In the case of Nunes and Dreze’s car wash experiment, the findings indicate that consumers place higher value on a 10-square loyalty card with two pre-stamped squares, than on an eight-square loyalty card with no stamps.
People perceive a loyalty card with no existing stamps as worthless (which it essentially is). But a loyalty card with several squares already stamped alters people’s perception of the reward process – that loyalty card holds value, because it’s already made progress towards a reward.
Okay, that was a lot of numbers and hypotheticals. Let’s get to the point – how can business owners leverage the Endowment Effect to boost loyalty program sign ups?
1. Show Regular Customers What They’re Missing Out On
Image Source: Spotify
A great way to get customers hooked on your loyalty program is to give them a taste of the perks and benefits that VIP members enjoy. Your specific method for doing this will vary from business to business, of course – you might need to be creative and brainstorm ways to make this work.
Perhaps when a non-member makes a purchase in your shop, you can print a voucher on their receipt, and instruct your staff to point this out to them at POS. A busy takeaway café might make it a one-off “skip-the-queue” voucher, while a retailer might offer 20% off their next purchase.
Online businesses can offer free shipping to first-time customers. After this first transaction, their details are logged and they won’t receive access to free shipping again unless they join your loyalty program.
Once customers become accustomed to this more luxurious and personalized customer experience, it becomes theirs. They own it, and it becomes more valuable to them.
Image Source: Journo Portfolio
I recently started a free membership with Journo Portfolio so I could display my published articles in an organized portfolio for clients to see online. Before long, I was prompted to try a free seven-day trial of the PLUS version, where I’d enjoy unlimited articles and web pages, and increased customizability.
Needless to say, I decided it was worth paying a couple bucks a month for a more comprehensive and professional-looking portfolio. But the more I personalized it and made it my own, suddenly I wanted even more customizability! I wanted my own domain without Journo Portfolio in the URL, and I wanted my own email account.
I upgraded to PRO, and it all stemmed from giving me a taste of “ownership” with the free seven-day trial.
2. Offer an Exclusive, Limited Time Only Upfront Incentive
By waiving the joining fee, PureGym is able to boost signups during winter (a typically slow period) and ultimately make more money from subscriptions than what the business makes from initial signups. Image Source: Twitter
At Stamp Me Loyalty Solutions, we’re big believers in offering an upfront incentive for customers to join your loyalty program. Why? Because we’ve seen first-hand that businesses which offer an enticing reward upon signup build registrations more than three times faster than businesses which don’t.
It’s an extremely effective technique when you want to boost loyalty program sign ups.
In an era where consumers expect instant gratification, offering an upfront reward just for signing up to a free loyalty program is a highly effective technique. Not only does it require zero commitment from the customer, but it assigns ownership to this newly created account.
Let me go back to the car wash experiment: your upfront reward is basically those two pre-stamped squares. The customer immediately sees progress towards their next reward, just for joining.
They’re already earning points, redeeming rewards, engaging your program and developing an emotional connection to your brand from the get-go… Endowment Effect!
If you really want to “up the ante”, you might consider putting a time limit on these upfront incentive offers to encourage a sense of urgency.
3. Get Customers Involved in the Decision-Making Process
Image Source: Amazon Prime
In an incredibly successful marketing stunt, Amazon invited its viewers to watch numerous TV show pilot seasons for free and vote for which ones they thought should be turned into full series.
Now, I’m a little skeptical about how much influence the viewer votes actually had on these very important business decisions, but it doesn’t matter – this strategy was incredibly successful in getting people’s attention and ultimately boosting subscriptions to Amazon Prime.
Non-members could join the free 30-day trial, watch Amazon’s original content, provide direct feedback on which TV shows they liked or didn’t like, and feel like they were contributing to Amazon’s offering. Once they were hooked on a few series, of course they would start paying for a subscription in order to keep watching!
By encouraging a sense of contribution and ownership, you can foster an emotional connection between the customer and your brand. This brings me to another of my favorite customer loyalty statistics:
Customers who feel an emotional connection with a brand have a 306% higher lifetime value and will recommend that brand 26% more than the average (Motista).
You can guarantee that when Amazon Prime was running this pilot seasons campaign, subscribers were chatting amongst each other about which seasons they voted for and why. This likely leads to word-of-mouth referrals, and builds hype around the brand.
How can you apply this strategy to boost loyalty program sign ups for your business?
Let’s say you own a café. You could hold a competition along the lines of, “Which of these five sandwiches should we add to our menu?”. Promote the competition in-store with posters and brochures, and via your website and social media channels.
Make it clear that in order to vote, customers need to download your free digital loyalty app and sign up (at which point they’ll receive an upfront reward for joining, like a free cookie with their next coffee purchase, for example).
Customers love to have their opinions heard by a brand. If you offer them an opportunity to vote, and make the process simple and straightforward, many will join your loyalty program in order to do so.
Having voted and received their upfront reward for joining, you’ve successfully inspired a sense of ownership that will likely see those customers becoming loyal customers to your brand.
And just like that, the Endowment Effect has helped you boost loyalty program sign ups!
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