Loyalty programs run promotions all the time to try to increase engagement or encourage members to take certain actions. These promotions can take many different forms including discounts, bonus points, bonus status credits, cashback offers or sometimes competitions.
For loyalty program members, any promotion is better than none – and some promotions can be extremely lucrative. But increasingly, there seems to be a trend towards loyalty programs running competitions instead of offering a guaranteed bonus or discount.
Competitions are of course great for the very small number of winners. But, like with many lotteries, the vast majority of people will get nothing out of it.
For example, Flybuys and Velocity Frequent Flyer run regular promotions encouraging Flybuys members to transfer their points to Velocity. In past years, promotions typically offered a guaranteed amount of bonus points for every block of points transferred. But these days, the incentive is increasingly just an entry into a prize draw.
For example, in October and November this year, transferring Flybuys points into Velocity just gave you an entry into a draw. The prize was 2 million Velocity points or one of 10 runner-up prizes of 100,000 Flybuys points (worth 50,000 Velocity points). That’s a great prize for the lucky winner, but most people will get nothing out of it.
In another example, American Express brought back its annual Shop Small promotion last month. This promotion is designed to encourage people to shop with small businesses – an admirable concept.
In previous years, this promo has given Amex cardholders either cashback or bonus points when spending with participating small businesses. But this year, shopping at participating small businesses merely gave you an entry into a draw to win one of 10 prizes of a million Amex points.
Again, that’s a great prize – but only 10 people will benefit from this competition. For this reason, AFF members were generally unimpressed with this promotion.
Qantas Business Rewards has also run promotions recently to win a “share” of points from a fixed prize pool. At least in this case, everyone gets a prize. But as more people participate in the promotion, the prize pool gets smaller and you have no idea how much you’ll actually earn until the competition closes.
Why do loyalty programs prefer competitions?
The main reason a loyalty program would prefer a competition over a guaranteed bonus or discount is likely to control costs. The marketer has probably been given a limited budget to work with. Having a fixed prize pool with a known value avoids the risk of the competition running over budget.
Offer a valuable major prize also lets the loyalty program advertise the higher headline prize. This theoretically sounds better in marketing communications and probably makes for a better news headline. But most AFF members can see past this.
For loyalty program members, competitions are not as valuable because the expected rate of return is generally lower. Overall, most people would be better off with a small but guaranteed reward, rather than a minuscule chance to win a large prize.
Loyalty programs may reduce costs and limit risk by running a competition over another type of promotion where everyone gets a reward. But if we assume that most people think rationally (admittedly, perhaps they don’t), the result could be reduced engagement with the promotion. Is that really better for the loyalty program?
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