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Changing the Rewards Game With Game Theory

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Changing the Rewards Game With Game Theory
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Martin Seligman is the one of the best known progenitors of thought concerning human behavior and motivation. Some of his work has led to game theory development and, if studied further, could influence the future of how rewards are delivered within loyalty marketing programs.

According to Seligman, there are three principal types of rewards, Fixed, Variable and Avoidance.

Fixed Rewards

  • The foundation of most loyalty marketing value propositions for the past 20 years, “spend a buck, earn a point” establishes a predictable pattern in the minds of program members and creates the habit of repeat purchase that is hoped to lead to longer term brand loyalty
  • Rewarding online behaviors such as voting on comments, or changing template colors can progressively unlock badges for members who engage more and more in the community

Variable Rewards

  • Awarding members for regular visits or meeting purchase thresholds without explicitly exposing the formula used to calculate rewards can be highly effective
  • Normally, variable ratios and intervals are used to randomize the issuance of rewards around an average
  • Due in part to the curiosity created among members, this method stimulates an expectation that keep people engaged in a program and has them “coming back for more”

Avoidance

  • Yes, even the use of a negative can turn a positive result in human behavior. The threat of a “negative reward” represents a form of punishment that keeps members active
  • Forcing a user to revisit your website and log in once a week to avoid their “elite” status to be taken away is an example, and the tier thresholds in airline frequent flyer programs work much the same way

Seligman’s research has shown that behaviors learned on the variable schedules produce the highest activity rates among users and are much harder to extinguish. The value user engagement environments built around game theory capitalize on a blend of fixed and variable reward patterns and can incorporate avoidance elements to maintain user engagement levels.

A companion thought is how we can redefine “recognition” within a loyalty program. For years, we’ve been touting the “balanced blend of reward and recognition” as the key to building a successful consumer value proposition. Recognition historically has been defined as special privileges afforded to people based on membership tenure or spending levels.

Now, a school of thought is emerging that redefines recognition as “public acknowledgement”. In other words, ego must be served and most of us humans tend to like the opportunity to be recognized as a standout among peers and colleagues. It is this tempting recognition that is being offered today at many e-commerce sites using game based strategies.

The biggest win in putting game theory to work in loyalty programs is the possibility to create the same behavior change among a member group at a significantly lower cost. Consider that rewards cost has traditionally represented 80% of total operating budget for a loyalty program, and you can see the opportunity to slice into that number is irresistible for most brands.

As part of building a framework for Social Loyalty in the future, we’ve extended our field of study to areas that many marketers have missed. We can no longer bribe consumers for a transaction and have to dig deeper to understand how they are motivated to act at their innermost core.

This one tidbit can not only improve loyalty program performance but also reduce costs, a “twofer” that any marketer will like.

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