Stories | July 12, 2017

Why your reward card could be costing you

Loyalty schemes can be attractive – but the goal of the "free gift" can make you spend more

Standing in line to pay for your morning latte, you hand over a small piece of cardboard for the barista to stamp, taking you one step closer to the satisfaction of a coffee on the house. 

But did you know that seemingly innocent reward card could actually be making you spend more?

Researchers have found that as people accumulate more reward stamps, they start buying coffee more frequently. 

In fact, in the study by Columbia University and Fordham University, the average time between coffee purchases decreased by 20 percent from the first stamp on the card to the last. 

The results implied that, in a typical month, reward card members bought two more coffees on average than they would have without a reward card in order to earn their “free” coffee. 

Increased effort
It’s a demonstration of the “goal gradient hypothesis”, a phenomenon first described by psychologist Clark Hull in the 1930s.

His classic experiment found that as rats got closer to food on a runway, they began to run faster. 

Humans, like rats, increase their effort the nearer they get to their goals.

But it can be our perception of goal distance that matters, not the actual distance, as the Columbia and Fordham academics demonstrated in their follow-up study.

In that experiment, they gave one group a reward card that needed 12 coffee stamps for a free drink – but with two stamps already completed – and the other group a card which needed ten stamps to get a free drink, with none completed.

So, both groups needed to make the same number of purchases to get their freebie.

But those who had the pre-stamped cards completed theirs in 12.7 days compared to 15.6 for the others. 

All an illusion
Because the reward was framed in a way that made people feel they had made more progress towards it, it encouraged them to increase the effort they put in to achieving it.

It’s known as the “illusion of progress”, or the “endowed progress effect”.

Similarly, retailers may use large numbers of points on their reward cards – that in reality are worth very little – to make shoppers feel they have achieved much more than they have.

In a study described by Professor Art Markman in Psychology Today, diners in a loyalty programme who accumulated 800 out of the 1,000 points needed for a free meal were happier than those who had spent the same but were awarded 80 out of 100 points needed for an identical reward. It seems a larger number, however arbitrary, had a greater psychological impact.

But while retailers may use the goal gradient effect to lure us into buying more, we can also use it to our advantage, by setting goals in a way that will ensure we stay motivated, for example.

Moving the goalposts
Say we want to start reading more: should we tell ourselves we will read 52 books this year, or one book a week?

As this Farnam Street blog explains, not only does moving the goalposts forward drive our enthusiasm, but by repeatedly – weekly –proving to ourselves that we’re capable of accomplishing our goal, we enjoy instant rewards, rather than delayed ones, so our focus is enhanced.

It can help us to save more, too.

Professor John Lynch from the University of Colorado Boulder tells the Wall Street Journal that a €4 latte might seem like an “inconsequential drop in the bucket” when measured against a retirement savings goal of, say, €1 million, but it feels important if your goal is to save €300 this month.

And banks can do their bit too, argue Dan Ariely and Peter Foley, by framing customer information in certain ways. So, as people near their savings targets, their online banking dashboards could switch from a cumulative total to an “X percent away from your goal” framing. This “mirrors a runner approaching the finish of a race,” they explain.

Aside from improving our finances, the goal gradient hypothesis might even make us nicer people. A study published in the Journal of Experimental Social Psychology found that we are more likely to get involved with charity campaigns when the charity is nearing its goal.  

Efforts at the late stage make donors feel they are personally having an impact, which gives them immense satisfaction, the authors said.

So whether you use it to motivate yourself to save, read more books, or even get involved in charity work, the goal gradient hypothesis can be a helpful tool in our lives.

But if you’re going to use loyalty programmes, focus on how much you have to spend in order to get the free gift – rather than how many points you’ve already accumulated – to make sure your “reward” card really is rewarding you. 

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