Tuesday, November 30, 2010

Sell Upgraded Loyalty Programs

The Los Angeles Times business section recently reported on what I consider to be a potentially risky trend among retailers: Significantly increase the value of discounts given to loyalty program members. For example, Toys R Us Inc. says they’re tripling the rebate amount on purchases.
     The danger comes when the additional largesse is reined back in. Unless the retailer plans to make it a permanent change, there are likely to be disgruntled customers who have been shopping with you regularly. The beliefs, feelings, and intentions of the consumers will be like what happens when you raise the price on merchandise. But we can justify price increases with explanations of costs of the product to us. We can’t use that explanation when revoking a rebate or discount privilege that had been granted.
     One way to avoid the problems is to, from the start, set a clear time limit on the augmented program. Toys R Us says theirs lasts through Christmas eve. If you choose this route, giving an explanation helps convince consumers that your pricing and loyalty program policies are reasonable, not arbitrary. You might say something like, “We realize that for many of our customers, budgeting for the holidays is tougher than in years past. So we’re running a special promotion over the next two months in order to help out.”
     Another option is to sell upgraded loyalty programs. Videogame retailer GameStop Corp. offers customers PowerUp Rewards for free and PowerUp Rewards Pro, which grants additional discounts, for $14.99 annually. Borders Rewards is free, while the additional 10% discount with Borders Rewards Plus is available for $20 a year. One clear advantage of this approach is that you can later change the rules of the upgraded program—the fee for the upgrade, the additional privileges—without polluting the feelings about the free program.
     Here are two shopper psychology tips about selling upgraded loyalty programs:
  • Use the same research-based pricing tactics you would with merchandise. The use of $.99 pricing by GameStop is better than the whole dollar pricing used by Borders.
  • You’ll make a little money from sales of the upgrades. Still, the primary purpose is to strengthen the purchasing habits of your customer. Because they have paid for the ability to get rewards rather than receiving them for free, the customer will be more motivated to use the privileges. Consumer psychologists call this the “endowment effect.”
Click below for more:
Use Partitioned Pricing to Highlight Benefits
Round Prices for Whole Dollars for Better-Best
Reconfigure Your Own Endowment Effect

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