Capital Ideas: Going for the Goal

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Going for the

This article was originally published in the November 2008 issue of Capital Ideas, a publication highlighting faculty research at Chicago Booth.

The issue featured selected papers in marketing.

For more information, visit ChicagoBooth.edu/CapIdeas.

GOAL

T h e H u m an P s y c h olog y of R e w ar d s

People tend to exert more effort as they get closer to their goals. Companies can take advantage of this by designing a customer rewards program that makes the perceived distance to the reward seem small. By Vanessa Sumo | Research by Oleg Urminsky

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n a classic experiment in the 1930s, behaviorist Clark Hull observed that rats on a straight runway ran faster as they moved closer to the food box. Knowing the reward was almost at hand presumably motivated the rats to work harder, a phenomenon that Hull called the “goal-gradient” hypothesis.

While this behavior has been extensively studied in animals, its implications for humans are unclear. “Unlike most animals, people can think ahead,” says assistant professor of marketing Oleg Urminsky. “We pace ourselves, so we don’t have that degree of impulsive behavior.”

It’s true that people don’t quite break into a run as they approach a restaurant or a bar. But when pursuing certain goals, humans may exert more effort as they get closer to the finish line. Toward the end of a long commute, people may drive a little faster as they approach their homes. Or they may become more motivated as they near the completion of a project at work because they know that praise, a fat bonus, or other incentives await them in the end.

However, finding clear evidence that the distance to a goal can affect motivation in humans can be difficult. “A lot of times it’s unclear how much progress we’ve made with each step,” says Urminsky.

To be able to describe more precisely the relationship between efforts and rewards, Urminsky and coauthors Ran Kivetz of Columbia University and Yuhuang Zheng of Fordham University turned to customer rewards programs in their study “The Goal-Gradient Hypothesis Resurrected: Purchase Acceleration, Illusionary Goal Progress, and Customer Retention.” Rewards programs, like coffee cards and frequent flyer benefits, typically give customers points for every product they purchase, and the points are accumulated to redeem a prize. In this study, the authors analyzed whether customers in a rewards program tend to buy products more frequently or make larger purchases as they get closer to a reward.

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Feature Capital Ideas Customer rewards programs are a popular way for companies to give perks to loyal customers or to lock them in.

But if the distance to the goal really matters—as the study asserts—then a loyalty program can offer much more.

Because participation in a program can be highly motivating, a well-designed loyalty program will not only help keep customers, but will also encourage them to spend more as they accelerate toward the reward.

Goal Rush Field experiments were conducted to test the goal-gradient effect and whether consumers accelerate their efforts to earn a reward as the distance to the reward decreases. The authors examined raw data collected from the experiments and used the data to estimate a model that captures the effect of goal distance on customers’ efforts. Goal distance was measured by the proportion of the original program requirements remaining to meet the goal.

as they progressed toward their reward. On the other hand, those who were issued “transparent” cards that tracked the purchases but were not eligible for a free coffee did not speed up their consumption as they approached their tenth coffee.

The same was true for customers who did not complete their cards, presumably lacking motivation to do so.

Another interesting finding is that customers who completed two consecutive cards slowed their coffee purchases right after they received their first free coffee—when they found themselves once again far away from earning the next reward. They then accelerated as they got closer to getting another free coffee on the second card. Customers seemed to “reset” the speed with which they bought the next coffee after they had claimed a reward, which is consistent with the goalgradient effect. This also rules out other explanations for why customers seemed to come back sooner for that next cup. If interpurchase times didn’t lengthen after the first card was completed, then consumers learning about the program or even an addiction to coffee may be a better explanation for why customers kept rapidly coming back for more.

The tendency to reset was also found in another test that used data from a music-rating program called Jaboom.

As an incentive to rate more music, participants in this rewards program were given a $25 Amazon.com gift certificate for every 51 songs they rated on the Jaboom website. The authors observed that the number of songs rated increased as members got closer to earning their first gift certificate, dropped after they earned it, but then accelerated again as they moved toward their second reward. This means that the tendency to rate more songs on subsequent visits was not because participants learned to work faster with repeated visits.

Aside from visiting the website more often and rating more songs during each visit, Jaboom participants were less likely to quit a music rating session the more songs they had accumulated toward the 51-song goal the authors also found. Extending the findings of the coffee cards experiment, effort in which this task was manifested not only in the frequency of visits but also in terms of intensity and persistence.

Companies should not necessarily think of a customer rewards program as just a system for rewarding loyal customers.

The first experiment looked at coffee purchases by customers who participated in a coffee rewards program at a café located within the campus of a large university. Customers were offered a card that would let them earn one free coffee after buying ten coffees. To keep track of the timing of purchases, a participant’s card was stamped after each purchase.

As participants in the rewards program accumulated more stamps on their cards, the authors observed that the average length of time before the next coffee purchase decreased.

Members bought that next coffee sooner the closer they were to getting a free one. In fact, the average time between purchases accelerated by about 20 percent from the first to the last stamp on the card. In other words, members purchased two more coffees in the time it took to complete the card than they would have if they hadn’t accelerated their purchases.

Even after controlling for various time trends that might affect the results, such as the weekly number of issued stamps (some weeks experience brisker sales than others) and the end of spring classes (when some students graduate), the authors found that customers bought coffees more frequently 34 Chicago Booth Magazine Spring 2OO9

The Illusion of Progress That effort increases with proximity to a goal could also be explained by a straightforward cost-benefit analysis. As the distance to the goal diminishes, an additional unit of effort

yields a larger benefit each time because it reduces a greater percentage of the remaining requirements for earning the reward. When a customer has a card with more stamps already accumulated (and a shorter distance to the goal), the objective value of the card is higher and further participation is a better deal. This would mean that when customers were offered either a 10-stamp card or a 12-stamp card with two bonus stamps already filled in, they should have been indifferent to which they received, because both effectively required purchasing 10 coffees to earn a free cup.

However, the authors think that relative rather than absolute distance to the reward drove consumers to speed up their coffee purchases. These two cards might not have looked the same to the consumer and affected their behavior in different ways. A 12-stamp card seemed like a bigger challenge, but starting out with two bonus stamps may have made the consumer feel as if some progress had already been made. An empty 10-stamp card, on the other hand, could have made them feel that they were just about to begin the program.

Giving consumers the impression that they were not so far away from the reward might have been the kind of nudge that customers needed to encourage them to buy more coffee.

“The illusion of having already made progress would compel customers to complete those 10 purchases faster,” says Urminsky. Indeed, the authors found that it took customers 15.6 days to complete the 10-stamp card, compared with only 12.7 days for the 12-stamp card with the bonus stamps.

Creating the illusion of progress, for instance, enhances motivation by reducing the perceived distance remaining to a goal. Marketers can give customers a head start by providing bonus points when customers sign up for the program, while simultaneously increasing the number of points required for a reward by the same amount. This not only makes it more attractive than other programs that don’t give away free points, but it also encourages customers to actively pursue the reward once they join.

Another important aspect of motivating customers is to provide them with regular updates about where they are in the program. “It’s important for customers to know how much progress they’re making,” says Urminsky. Coffee club members, for instance, see the number of stamps on their card every time they open their wallets. If customers have no idea of how close they are to a reward, then the goal might fade from their attention and they might lose interest, slow their purchases, or even quit.

If marketers want to target less motivated customers, they should also track their customers’ progress in the program.

Marketers can find out who the less motivated consumers are, since acceleration seems to be a good measure of motivation and decelerating customers are less likely to finish the program. The study found that consumers who accelerated more quickly toward the first reward were more likely to come back, reenroll in the program, and even earn a second reward. That should give companies an incentive to pay close attention to their loyalty programs, which—far from being passive—can actually engage customers and change their behavior if done the right way. n

It’s All about Motivation

To read “The Goal-Gradient Hypothesis Resurrected: Purchase Acceleration, Illusionary Goal Progress, and Customer Retention” or to learn more about Oleg Urminsky’s research, visit ChicagoBooth.edu/magazine/facultylinks.

Oleg Urminsky is assistant professor of marketing. He studies consumer and managerial decision making and its implications for marketing management.

Dan Dry

“Companies should not necessarily think of a customer rewards program as just a system for rewarding loyal customers,” says Urminsky. Such programs mainly bank on switching costs to keep customers faithful to their products.

While it is true that having half the number of stamps on a coffee card would make it costly to move to another coffee brand and start all over again, companies can make the most of a customer rewards program by taking advantage of people’s tendency to put in more effort as they approach a goal. Even a company that does not offer a customer rewards program (perhaps because it feels that it is much stronger than its competitors) should rethink this strategy, because participation in a program can actually motivate customers to make more purchases faster.

To maximize the benefits of a loyalty program, marketers should design one in such a way that people perceive that they’re getting closer to a reward.

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