Designing Loyalty Programs

American wallets are stacked with a number of loyalty program cards.  Be it a bookstore, or a coffee shop or a shoe store or a medical store, companies want to track your purchases.  Until recently, I have never stopped to think about how different the programs are. The thought-process started from a discussion about the Barnes and Noble’s loyalty program I had with an executive.

B&N loyalty program is a pay to play scheme, i.e., you pay an annual fee of some $25 and get 10% discount on purchases (I don’t remember the exact numbers).  So, essentially, if you spent more than $250 per year, you are better off.  B&N has designed it such that even if you did not have your card handy, the cashier will be able to give you discounts because he/she only requires your phone number.  They have made it easy because it relieves me from carrying around the loyalty card.  The cashiers do not bother to check any form of id either — I think it is their company policy.   The question that struck me was: would the patrons be freely sharing the card, or would they care about the company and not share it?  I own a B&N card but I have never shared it with anyone (except for my wife, of course).  But I was reasonably sure that these cards are shared by others.  Unsurprisingly, I found a number of people who shared their cards.  They often referred to the card as a “discount” card rather than a “loyalty” card. The adjective that they used possibly describes how they instinctually related to the card.

B&N did not change the existing processes but started gamifying the loyalty program and rewarded people based on how extensively they used the loyalty program cards.  I would expect the perverse incentives to more likely kick in that could lead to worse outcomes for the company.   I don’t have any measure of how successful this gamification venture was but I had an opportunity to chat with a local B&N store cashier soon after their roll out.  Apparently, on the weekend before my visit, a customer generously shared the loyalty card details — i.e., her phone number — so that everyone in the line behind her could get discounts also. Perhaps, the customer did so to win in the gamified engagement.

The question from a “design for instinct” standpoint is: how would you change B&N’s loyalty program so that it still offers the benefit of its customers not carrying the card or id but at the same time limit free-riding?

A colleague of mine, Mohit Tawarmalani, and I discussed this issue and we came up with the following answer.  Anytime someone uses the phone number in order to take advantage of the reward, why not just charge the customer full amount (without discount) but keep track of the discount amount separately?  The only way someone can redeem the discounts is by showing some form of ID or by showing the loyalty program card.  This simple change will naturally limit the use of shared cards.

 

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“Design for Instincts” Talk @ CTS’ Innovations Week

On March 22nd, 2013, I was at Cognizant Technology Solutions (CTS) to give a talk related to  “design for instincts” for the insurance vertical’s innovations week.  I thank my friend Venky Vijayaraghavan and his colleague Karthik Sivasubramanian for inviting me.  There were two other speakers who did a fabulous job and in some ways further instigated my thinking on “design for instincts.”

EswaranNatarajan, the head of Operations & Technology at ICICI Lombard,  gave a very engaging talk and he described some of the problems that his company faced and how they used their engineering prowess to overcome the problem.  He gave examples of how when they used the mobile phones, they discovered that they couldn’t take more than 20 pictures and what they did to overcome the problem.  The process described seemed to indicate that ICICI does the root cause analysis really really well and then uses the analysis to find a solution.

Sukumar Rajagopal, CIO of CTS, also gave a very interesting talk.  His presentation seemed to synthesize management philosophies for innovation.  He specifically mentioned how in 1983, BMW and Benz were dominating the market with a good fuel performance, little noise within the car, car being light, etc.  He contrasted with how Toyota innovated to overcome the problems, which initially seemed implausible.

I felt that both these speakers spoke about engineering innovations.  I am an engineer by heart (hold bachelors and masters degrees) and many in the audience were too.  However, their innovations need not be just restricted to engineering ones.  With the power of information technology growing, it is the right time for us to push the envelope in non-engineering ways particularly those related to human behavior.

In engineering innovations, the main process is to identify the root cause of the problem and create solutions to overcome it.  However, in non-engineering innovations involving shaping human behavior, it is important to understand how we behave instinctively and develop designs based on them, a.ka. “design for instincts.”  On this regard, I wish to highlight a student project initiative that CTS is pursuing with ISB via my course.   One objective is for the students to carry forward the “design for instincts” thought-process that they have learned in my class and propose a learning platform for CTS.  I was happy that the EswaranNatarajan recognized our effort positively during his presentation.

 

Update on April 4, 2013: corrected Eswaran-natarajan as the ICICI person giving the presentation.