Coaxing consumers: the psychology of reward schemes

MIRAH LANGER

“These businesses are using a concept in behavioural economics called ‘nudge’,” says behavioural economics lecturer David Zidel in an interview with the SA Jewish Report.

“They are nudging people to behave in a certain way that would supposedly be good for the company and the individual.”

He says, ideally, the situation creates a win-win for consumer and company. “[The reward scheme] will bring more loyalty and more business to the company, but it will work only if it works for the customer as well.”

Companies use these kind of cash-back schemes to entice customers to remain loyal to them when shopping.

“That’s the premise. What they’re trying to do is ensure that if you shop more and more often at a particular spot, they’ll give you more and more rewards. It encourages you that this is going to be of benefit because it’s like getting, in the old sense, a kind of a bulk discount.”

In fact, observes Zidel, who lectures behavioural economics at a number of business schools in South Africa, the psychological principles being used are “nothing new”.

“The difference is that before, instead of getting cash back, you would go into the store with a coupon.”

As such, these schemes are a kind of grown-up version of previous paper promises of savings, using the possibilities of technology.

“The psychological implication of a cashback is that if [in the past] a company said to you, ‘You will get 5% off your purchase, well that doesn’t feel like much,” says Zidel.

“However if [now] the company accumulates all these ‘5%s’ and at the end of the month or the end of six months, it gives you a few thousand rand back, well now it has an impact. Now it feels substantial.”

Zidel says that studies have proven definitively that a significant proportion of people are incentivised by these kinds of scheme, including ones that promote behavioural change such as getting healthier.

What the studies have not yet conclusively proven though is whether these outcomes are best achieved through schemes that reward or punish you. As such, some companies are experimenting with a combination of both. For example, they might offer upfront benefits which, if certain guidelines aren’t followed, will then be withheld or withdrawn.

Dinesh Govender, the chief executive of Discovery Vitality, one of South Africa’s most well-known behaviour-change incentive schemes, says the psychological principle of “nudging” customers has certainly proven successful in its case.

“Knowing you will benefit in health, but also earn tangible rewards, anything from a simple cup of coffee, to devices and travel, means your healthy lifestyle is twice as fruitful.”

The evidence from the organisation’s customer base is that “encouraging setting small, incremental goals for change rather than a single large goal” does indeed lead to “habit formation” in the long run.

From a business point of view, the company too is able to reap rewards as by becoming healthier, the risk profile of customers is lowered, “which improves Discovery’s business performance through lower insurance claims”.

The company has traced the concrete outcomes of some of its incentives and found that, for example, many people that use an incentive such as getting an Apple Watch to track physical activity do, in fact, become more active. Company statistics show that on average, people increased their activity levels 34% after this purchase. Furthermore, it found that along with the positive incentive of getting the watch upfront, the possibility of having to pay back the money for the watch – if activity levels are not maintained – also incentivises people to stay physically fit.

Turning specifically to the psychology behind store cards such as those issued by supermarkets, Zidel says that while the main aim of these companies is to obtain long-term customer loyalty, the data that they gather is an additional benefit.

“There are some companies that are using the data in a very efficient way, and are really getting to understand their customer.”

For example, it allows companies to home in on targeted advertising.

“If they understand what you are buying on a monthly basis, then they can offer you other specials that talk specifically to you. For example, if they know that you order kosher meat, then whenever there is a special, they can send you a message rather than just bombarding you with adverts for bacon,” he says.