• by editor , David Baker , August 28, 2006

If your boss asked you to explain the difference between a rewards program and a loyalty program, how would you answer? Many people might say, "a rewards program is a part of a loyalty program." Sounds reasonable. Anyone can see how a loyalty program could include rewards elements. Then again, a rewards program could also have loyalty implications. Yet, as you think of great ways to engage your customer base and attract new customers, have you thought about the real costs of offering rewards--and the behavioral downside of conditioning consumers to them or what loyalty really means to your business?

A client once asked me the cost of doing a points program (or a "token economy," as many call it). Rather than give him a finite dollar amount, I asked if he understood the behavioral costs of introducing such a program to his customers.

Jack Aaronson, CEO of the Aaronson Group, wrote a series of articles on rewards for ClickZ in 2005. A couple of his key observations included: "A reward program is a customer retention strategy, not a loyalty strategy. You entice people to transact again with your company based on a reward or an incentive." And "customer loyalty is when customers transact with your company again of their own free will."

Most consumer businesses try to promote sales through rewards and loyalty-push and pull. Our goal as marketers is to do this as cost-effectively as possible while appealing to the highest number of consumers. Combine this with the relative cost efficiency of digital channels and it makes for a perfect storm. The value economy you are trying to develop (that is, the value exchange between your customers and your business), is a sensitive thing, and the sheer nature of rewards and frequency can dramatically increase the overall cost of managing this relationship over time.

I liked Aaronson's article because he laid out B.F. Skinner's methodology and categorization of the behavioral side of rewards. While we all talk about diminishing response and general numbness of e-mail, I think we may be focusing on the wrong elements when every other e-mail has a sale, reward, or incentive element to it ("Free shipping!" "Buy 2 and get 1 free!," etc.).

As I track competitive programs, it is interesting to see how little strategy is put into incentives and rewards. Lack of a consistent schedule or logic fails many. When I talk to clients and industry colleagues, we talk at a very high level about loyalty programs and relationship marketing --yet very rarely do we talk about the numbing effect of providing too many incentives to reward consumer interaction. So, I ask again, are you sure you know what the cost of those rewards is, and do they really condition the type of relationship or behavior you desire?

To help you understand this logic, I'll summarize what Aaronson wrote in his article. There are three ways to categorize rewards:

· Continuous reinforcement: the consumer is rewarded every time s/he performs the desired behavior. Example: an online retailer that offers free shipping with every order.

· Fixed ratio: The consumer is rewarded based on repetition a fixed number of times. Example: buy 10 (tickets, T-shirts, etc.) and get the 11^th free.

· Fixed interval: Rewards given based on time intervals. Example: a store that has a special discount on a specific day of each month.

Aaronson sets these out in more detail when discussing the relative considerations that go into each level of rewards.

1. Learning curve: how difficult or easy is it for the consumer to interact with the reward program? People often call this adoption, but I refer to it as level of involvement.
2. Frequency: how often does the consumer interact with the program/system?
3. Decay: at what rate and to what extent do consumers drop off when the rewards stop?

The moral of this story for the e-mail community is as follows: Rewards have costs, and consumers learn how to redeem them for good or bad. Consumers have grown to expect them and if you hope to engage, cultivate and foster relationships over time, you should be creative and programmatic in how you drive these activities.

Keep in mind, some rewards/incentives can turn into business rules over time if overused.