Keep it a secret!

Why firms should not be that transparent to their customers when it comes to their loyalty rewards

You might remember an experience with a firm where you were positioned in the lowest status of their loyalty program (eg. the ‘Blue’ status from British Airways). You could see that the top-tier customers (eg. the ‘Gold’ status for British Airways) benefited from much more benefits than you did. How did you feel?

What is the problem?

Hierarchical loyalty programs classify customers into tiers according to their value to the firm. Logically, the best customers (top-tier customers) receive more rewards than bottom-tier customers because they are more valuable to the firm. These rewards help them feel valued and fairly treated by the firm.

However, top-tier customers are often rewarded to the detriment of the smaller ones. They are offered a larger number of rewards and more exclusive benefits, while bottom-tier customers enjoy fewer, less valuable benefits. In such a situation, bottom-tier customers who compare their loyalty programme benefits with those of top-tier customers can easily discern that they are entitled to less, and that the firm is making less effort to enhance their value proposition.

Here comes the issue for firms – How do customers from top and bottom tiers react to reward gap? How can firms make the most valuable customers feel special, without hurting the (currently) least valuable customers’ feelings? In this research, we provide answers to these tricky questions.

The solution? Offer a large reward gap … but keep it secret!

A first lab experiment in the retailing context shows that a large reward gap (that is, a large difference in the number and nature of rewards allocated to top-tier vs. bottom-tier customers) has positive effects on top-tier customers. It increases their perceived fairness and perceived control, which improves their loyalty to the programme. However, it has negative effects on bottom-tier customers, as it reduces their perceived fairness and perceived control, diminishing their loyalty to the programme.

So what should firms do? Considering that top-tier customers often generate the overwhelming majority of the firm’s revenue, firms could be tempted to favor large reward gaps if they want to keep their best customers happy. Should they ignore bottom-tier customers feelings? No, they should keep the size of the reward gap secret!

Indeed, thanks to a second lab experiment, we show that making the reward gap invisible to customers cuts off the potential unfairness that bottom-tier customers could feel. In fact, when the reward gap is not visible, direct social comparisons are more difficult. Therefore, bottom-tier customers may rely more heavily on internal criteria (that is, their own input (expenditure)/output (received rewards) ratio) to assess the fairness of the rewards they receive. In this case, it is ok for them to receive less! And top-tier customers can fairly enjoy their benefits.

In practice?

Managers have several options to make the reward gap size less visible. They can make the reward descriptions available to top-tier members only, which is precisely what Jacadi (a French children’s fashion brand) does: it has an exclusive VIP tier that only VIP members know about. Firms that want to reward their best customers without upsetting the customer base should also discourage all forms of status display, or make them very discreet. Club 5C, the loyalty programme of Relais & Châteaux – a French network of high-end hotels and restaurants – gives out no information about its VIP programme membership or benefits. Only scraps of information can be gleaned from the managerial press and travel websites praising the unexpected, tailored rewards guests receive. Another way to make the reward structure non-visible is to use customisation. New data-intensive approaches can collect a huge amount of individual information that firms can use to treat each customer as a market in their own right, and provide them with reward structures tailored to their individual buying behaviours and tastes. In such a case, visibility is no longer an issue (since individual tastes are inherently personal) and social comparisons become less relevant.

In doing so, firms limit frustration for bottom-tier customers, while ensuring that top-tier customers still feel pampered 🙂

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