How to reduce churn with loyalty rewards

Be careful who you give them to, they can easily backfire.

Today’s research is an opportunity to reduce churn by giving rewards to your customers. But be careful, when you ‘awaken’ them with a gift bad things can happen.

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Loyalty rewards reduce churn of your long-time customers

Impacted metrics: Customer lifetime value | Customer retention
Channels: Loyalty rewards

Recommendation

To reduce churn (i.e. increase retention), send loyalty rewards (e.g. 2 months of free phone calls) to customers that have been with you long enough. 

Don’t send rewards to those that are too recent. A few might spend more, but mostly they will leave to look for more rewards - from competitors. 

Test to find the right amount of time customers should be with you before they receive rewards.

Effects

  • Rewards reduce churn of long-time customers but also slow down some of their natural increases in spending. Put together, it’s still more profitable to reduce their churn.

  • For more recent customers, rewards encourage them to leave and seek more rewards elsewhere.

Why it works

  • Although most companies would love to have most of their customers constantly highly engaged, in reality about 70% of customers are “inert non-switchers” (i.e. they are happy with the status quo and can’t be bothered to look for another solution).

  • Your loyalty reward is a prompt that reawakens them to reconsider their options.

  • Customers that have been with you for a long enough time have invested significant resources in you and don’t want to regret doing so. They want to justify their previous decisions and dread the idea they could have made a mistake. This outweighs the likelihood that they will consider other options. Rewards reinforce their conviction that they made the right choice choosing you, reducing their churn.

  • It’s not clear why rewards increase the spending of early-stage customers (those that don’t churn) and slow the growth of some longer-term customers.

Limitations

  • If your customers are very highly engaged with you on a regular basis or have little or no alternative to your product or service, these effects will likely be different.

  • The study was performed on a B2C telecom provider. Results may or may not be generalized to other industries.

Companies using this

  • Several companies use loyalty rewards but they often struggle to track or deliver results. It’s not clear how many are successfully using them to reduce churn.

  • Some companies use more comprehensive and complex loyalty programs (e.g. airline miles), which are not covered by this study.

Steps to implement

  • Test loyalty rewards on sample customer segments depending on their maturity. Once you find the cutoff point where loyalty rewards are reducing churn, apply them extensively.

Study type

Online survey and field experiment with a telecom provider (brand kept confidential), Australia

Source

Henderson, C. M., Steinhoff, L., Harmeling, C. M., & Palmatier, R. W. (September 2020). Customer inertia marketing. Journal of the Academy of Marketing Science, 1-24.

[Link to paper]

Affiliations

University of Oregon, University of Rostock, Florida State University and University of Washington.

Remember: Because of the groundbreaking nature of this paper, it could be disproven in the future (although this is rare). It also may not be generalizable to your situation. If it’s a risky change, always test it on a small scale before rolling it out widely.


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