What is Reward Marketing and how to use it for customer acquisition, loyalty and retention

What is Reward Marketing?

Reward Marketing is the smart use of rewards and incentives by a brand to induce behaviors from target audiences. Those audiences are often existing or potential customers but not always, and can be affiliates, influencers, employees, agents or any other groups of people who the brand wants to target.

The behaviors are normally actions that have value to the brand such as becoming a customer, subscribing to a service, remaining a customer, upgrading, repeat purchasing or other actions that have value such as referring a friend, leaving a rating or review, uploading user generated content, helping other customers in a support forum, participating in a survey or even participating as part of a Customer Led Growth Strategy.

The key to reward marketing is that an attractive reward encourages a person in a target audience to take an action that they might not otherwise have taken, or to take that action sooner. Of course, the value of the action should exceed the cost of the reward or incentive, and ideally cost less than the cost of procuring that action by other means (such as via Paid Search or Paid Social).

Hear from Buyapowa’s Brand Director, Robin Bresnark about how to use Reward Marketing for your business:

What are the Benefits of Reward Marketing? 

While reward programs come in all shapes and sizes and can have vastly different use cases, all of which we will cover later in the article, target audiences and purposes, the key benefits are clear: Customer Acquisition, Convergence, Retention and Upsell. 

1. Customer Acquisition: Discounting is often seen as the go-to option for boosting acquisition and increasing share of wallet, but it comes at a cost. Margins are impacted, and the brand’s price perception can be undermined, reducing the likelihood of customers ever paying a full price in the future. Rewards such as gift cards or vouchers, however, can offer a smarter alternative, generating the same impact as discounts but without negatively affecting the perception of the brand.

   Particularly, in industries like telecommunications, banking, energy, and insurance, where it’s often difficult for a customer to distinguish between one offer and another, a well-chosen reward can steer customers towards one brand over its competitors. Rewards can also be precisely targeted to drive specific behaviors, like subscribing for a two-year package instead of a one year deal, or appeal to particular demographics, such as high-value, frequent, or lapsed shoppers, boosting acquisition where it’s most needed.

2. Convergence: It’s a well understood maxim that the more products and services a customer uses from one brand, the less likely they’ll switch or churn. Consequently, brands often try to broaden the number of services a customer uses by offering complementary packages.

   For instance, a wireless carrier might bundle home broadband with zero-rated streaming access, a mobile service and mobile wallet. An energy company might offer electric vehicle leasing or domestic solar solutions. A bank could provide insurance services, while an insurance provider might add health cover alongside property & casualty insurance.

   Offering rewards to customers to sign up for these packages can reduce churn and nurture long term and valuable relationships.

3. Retention: The Harvard Business Review claimed that, according to what industry you’re in, acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one. In fact, it appears that the last 8 years has seen an overall 222% increase in cost per acquisition.

   Rewards can play a crucial role in retention strategies by showing the customer that you value their business with a surprise and delight strategy, and by incentivizing renewals your can help reduce churn (for example, offering a US$50 Spotify gift card to existing customers who renew). Optimal moments to offer rewards to improve retention include on subscription anniversaries, renewal dates, indications of intent to switch (where a brand can offer an incentive to stay), and to counter competitive new offerings from rivals.

4. Upsell: Rewards are a powerful way to generate more value from existing customers, whether by increasing the value or term of recurring payments or by driving sales of higher-value products.

   For example, in telecoms, a well-chosen reward can incentivize customers on rolling monthly contracts to upgrade to fixed-term plans. In travel insurance, it can prompt customers to buy annual policies instead of single-trip cover. In energy, it can encourage single fuel customers to switch to dual fuel tariffs. For an e-commerce platform, an eye-catching reward can guide customers to purchase premium products instead of budget ones or subscribe to a free delivery program, reducing the likelihood of them shopping with competitors next time.

Hear from David Hixon, Executive Director – Head of Product & Lifecycle Marketing at Ally Bank why paying referral rewards to your customers instead of paying money to ad platforms can improve customer loyalty:

Types of Reward Marketing Programs

You’ll see rewards in dozens of initiatives, strategies and campaigns across the worlds. Typically, you’ll see rewards used in marketing in the following ways:

1. Referral Programs: Referral marketing is a powerful growth strategy designed to turn your existing and past customers into brand advocates, encouraging them to recommend your brand to their friends, family, and colleagues. Often known as word-of-mouth marketing, it amplifies natural positive buzz with easy-to-use sharing tools like referral links or codes and engaging gamification.

   Referrers typically earn rewards, such as discounts, credits, or cash, for the act of referring a friend, though the desired action may not always be to purchase. Some referral programs will support their referrers and referred-in customers with rewards throughout the various stages of the sales journey. For example, an insurance company’s referral program may payout one reward when the new customer gets a quote and another when they convert. The desired action is up to you.

“[What] I really love is, the cost to acquire is a lot cheaper – which is great, but also where I’m paying that money is way better. I’d much rather give an existing customer $100. Or $250 and presumably build up some loyalty with that than I would to one of the platforms to go out and do programmatic display or however we might use it. It just feels better. We haven’t quite figured out how to quantify that yet, but there’s a big loyalty thing happening when I’m giving my marketing dollars to my customers versus to an ad platform or something like that.”
David Hixon, Head of Product & Lifecycle Marketing at Ally Bank

2. Reward-Based Customer Acquisition Campaigns:“Sign up for [BRAND] this month and get $50 cash”, “Switch your current account and get £200 cash on us” – you’ve heard of these offers before and you will again. Reward-based customer acquisition campaigns have been on the rise for the last decade and they’re only getting more popular. Typically, these campaigns incentivize new customers with a cash (or equivalent) reward based on their purchase circumstances. This could be during a limited time or promotion period or depending on the channel that they convert through; a subway billboard that reads “Scan this QR code for a $20 sign-up reward.”

   Often the key to these campaigns is the offer of cash or a gift card that may not be associated with your brand but resonates with your target customer. Contrary to a discount promotion, a voucher or cash reward campaign can provide additional value to the customer outside of your offering without sacrificing your product’s perceived value – a common criticism of discount promotions.

3. Partnership Marketing: Referrals can come from more than just your own customers! Unlike more traditional marketing channels, partnership marketing provides a unique blend of trust-building and precision targeting.

   And, when used in affiliate-type programs, can allow businesses to maintain brand control while driving scalable performance based results. Obviously, your marketing partner will be able to encourage its own audiences to take the actions you want using rewards and incentives in the same way your brand would using its own referral program.

4. Customer Advocacy: Aside from referrals, a brand can get substantial value from encouraging customer advocacy from existing and past customers who leave helpful ratings and reviews and upload user generated content that help potential customers evaluate the merits of the brand’s products or services. Given that over 70% of consumers search through review sites assessing their options before purchasing with an online business, your advocates could be the key to both driving traffic to your website or app and more effectively converting it.

   Offering rewards for ratings and reviews or unique user generated content can greatly increase the amount of such content you’ll receive (although you’d be advised to make sure that the rewards are not so generous as to encourage fake reviews or posts, and that you disclose that rewards are offered and comply with the terms and conditions of any provider you use, as this will ensure these are viewed as being authentic).

5. Community Marketing and Customer Help: A shining example of using rewards to foster community collaboration and customer support is GiffGaff’s community.

   Inspired by the community-driven innovation of platforms like Wikipedia and Facebook, GiffGaff envisioned a mobile network built on mutuality, community, and shared collaboration. This network rewards its customers for taking on tasks typically handled by employees, such as technical support and FAQs. Highly engaged community members are rewarded for their active participation with goodybags and status based rewards etc.

6. Employee Referral Programs: Employee referral or Friends & Family programs allow you to tap into the advocacy of one of the most powerful channels for your product or service: your employees. This is because your employees are typically very knowledgeable and credible when recommending you to their trusted circle of friends and family.

   And as well as an effective sales channel, your employees can see this as an additional perk or benefit of being able to give a great deal to their friends and family. While the referred-in friend may get a special introductory price or package, your employee, who is typically already a customer can be given another reward for his or her efforts in convincing friends to give your product or service a try.

7. Employee Perks: Retention and loyalty in your customer base is important, just as retention and loyalty has value within your team. Employee perks or reward programs that recognize and appreciate your employees’ hard work and dedication can be an effective means to increase loyalty and enhance performance within your organization. These programs can include a variety of incentives such as monetary bonuses, extra vacation days, exclusive experiences, or personalized perks tailored to individual preferences.

What kinds of Rewards can you use?

Depending on the nature of your business, the value of each new customer to you and the strength of competition in your industry, the nature and type of rewards you offer can be any of these:

1. Rewards based on your product or service: such as a free month, an upgrade or bill credit. These rewards often have the lowest cost to you as the perceived value is based on the retail cost to the customer of an additional month or higher service level and not your cost of service, which is likely to be much lower.

   An added advantage is that these kinds of rewards can increase loyalty and future use. Although a disadvantage is that these might not be as appealing as cash or a third party reward, particularly when your service or product is unappealing like an energy supplier, and these can suffer from rapid diminishing utility, as you can only ever have so many free months.

2. Rewards based on a future purchase: such as a discount off next purchase, a gift card, loyalty points or other reward that can only be redeemed by buying from you again. Here once more, the advantage is that the reward can only be used with your brand and encourages repeat purchases and use, and if the reward is never used, there may never be any cost to your brand.

   However, this type of reward is often best suited for passion products and/or products where a customer is likely to repeatedly purchase, like in fast fashion or beauty. It’s typically less appealing for industries like telecommunications, insurance and energy.

3. Cash or near cash equivalents: such as a bank or Paypal transfer, pre-paid credit card or crypto currency. The advantage of this type of reward is that your customers can clearly see the value and can use the reward immediately and for any purpose. The main disadvantage for you is that this always has a cost and the reward may not be spent with your brand and may even be spent with your competitor.

   And while you might think all customers would instinctively prefer cash, because cash is fungible it quickly becomes forgotten about when put in a customers wallet or purse or bank account. Unlike a voucher, a customer is unlikely to think of your brand when spending the cash, which will probably be spent on a household item or given to children as pocket money.

4. Third party gift cards or vouchers: Particularly where you find it difficult to give an appealing reward based on the products or services you offer, offering a third party gift card or voucher can be an appealing alternative.

   These can range from near cash rewards like an Amazon or Walmart voucher to something very specific and experiential, such as a choice of adventure activities like white water rafting or parachuting. Like cash, these have a real cost for your brand and are unlikely to be redeemed with you, but the more specific the reward, like white water rafting, the more likely the recipient will connect the reward with your brand, creating increased loyalty.

5. Non monetary rewards: These should not be ignored as these can be very powerful. As in the example of Giffgaff above, status based rewards like bestowing a ‘genius’ or ‘ninja’ status to a community member can be very compelling.

   And if you’re lucky enough to have a passionate community of advocates that strongly identifies with your product or service like, say, Apple, you could offer branded merchandise like t-shirts and baseball caps.

6. VIP programs: These are another example of status based rewards, where, for example, a gaming brand bestows a VIP status on a member inviting them to special games and private sessions or an airline which offers complementary upgrades and access to business lounges. This can be a very successful rewarding strategy for your most valuable customers.

7. Free products and samples: These are a great option for a business that sells physical products such as a beauty brand that can offer free samples to loyal customers.

8. Contests: And finally, rather than offer a fixed prize, you could offer a chance to win a contest or sweepstake for a larger prize that can sometimes be more motivational than a smaller guaranteed prize.

The Science Behind Reward Marketing

If we take a step further into the science behind rewarding, we can see that the rewarding concept is so foundational within human beings that our brains have their own reward delivery system for encouraging behavior. The reward system, known as the mesolimbic pathway, is pivotal in influencing actions and motivations. This pathway releases dopamine, the “feel-good” neurotransmitter, as a reward for performing beneficial activities. This dopamine release is fundamental to forming habits.

By leveraging this system, brands can not only evoke pleasurable feelings but also create a pattern of habitual loyalty among consumers. This reward mechanism, which evolved to encourage survival behaviors such as eating and finding shelter, demonstrates the profound link between neuroscience and consumer behavior, illustrating the intricate processes that drive brand loyalty.

A recent study identifies the three behavioral elements of rewarding as reciprocity, pleasure, and recognition. 

Reciprocity: refers to the principle where customers feel compelled to return a favor or respond positively when they receive something of value from a brand. This psychological phenomenon is grounded in the idea that people tend to reciprocate positive actions, fostering a sense of obligation and goodwill.

In the context of reward marketing, reciprocity can be harnessed to build stronger customer relationships and loyalty. When a brand offers rewards such as discounts, exclusive access, or personalized perks, customers often feel a sense of gratitude and a desire to give back. And visa versa. If a customer feels they have supported a brand significantly, they’re likely looking for a reciprocated gesture. In fact, “31% of consumers believe it’s important that brands reward them with special deals and discounts.”

Pleasure: Dopamine-driven positive feelings and experiences play a vital role in repeat behavior. In the pursuit of pleasure, dopamine takes center stage as the conductor of our neural orchestra, regulating feelings of reward and anticipation. But beyond merely offering enjoyment, dopamine molds our brain’s perception of pleasure, fostering strong connections between stimuli and pleasurable outcomes. This neural imprint, coupled with the experience of positive emotions like happiness, forms the foundation of consumer behavior, driving individuals to seek out brands that evoke these dopamine-fueled sensations.

For businesses aiming to foster loyalty, understanding and harnessing this emotional resonance can cultivate a desire for repeated engagement, solidifying the bond between consumer and brand. By tapping into the power of pleasure, brands can create rewarding experiences that not only satisfy but also build lasting loyalty.

Recognition: stands out as a powerful tool for fostering trust and loyalty between customers and brands. Personalized recognition—making customers feel acknowledged and valued—triggers a series of positive neural responses. Acts such as expressing gratitude or acknowledging a customer’s loyalty can stimulate the production of oxytocin which enhances feelings of connection and trust.

This sense of recognition taps into a fundamental human need to feel seen and appreciated. By integrating personalized recognition into reward marketing strategies, brands can create stronger emotional bonds with their customers. This not only enhances customer satisfaction but also encourages repeat engagement and long-term loyalty, ultimately driving sustained business success.

Crafting an Effective Rewards Program

Here are some key tips for creating an effective Rewards Program:

1. Establish Your Program Objectives: Align the objectives of your rewards strategy with your broader marketing goals, such as increasing sales, retaining customers, or fostering brand advocacy. In this way, you can ensure you design rewards and a program that achieves your goals.
2. Identify Your Target Audience and Segment: It’s crucial to understand who your target audience is and understand what rewards and incentives will appeal to them. You can further segment them based on demographics, behaviors, and preferences to tailor your rewards programs to meet their needs more effectively.
3. Select Appropriate Rewards: Choose rewards that motivate your target audience, aligning with customer expectations. Ideally you would do some customer research to understand what rewards your audiences value.
4. Leverage Digital Platforms and Technology:You need to choose the right digital rewards platform for your business that enables smooth automated reward payouts without requiring manual reconciliation and provide audit trails to show who received and redeemed the rewards.
5. Measure and Analyze Campaign Performance: To improve the performance of your Reward Marketing you’ll need access to accurate and real time data and analytics to measure success. So make sure your Rewards Platform can provide this data and insights.
6. Choose the right partner: Success in Reward Marketing is so much more than just choosing the right technology, you need to choose the right partner to help you implement, run and improve your program constantly. That’s why we advocate a Saas plus Service model.

Taking it to the next level

In addition to the basics mentioned above, if you really want to take your Reward Marketing to expert level you’ll need to consider:

1. Offering rewards choices: our recent Reward Revolution Research found that participants in referral programs expect to be offered a choice of, on average, between 3 and 4 different reward types. It’s also a good idea to keep your program fresh by changing the rewards from time to time.
2. Create FOMO or the fear of missing out: if you want people to take action now then you should set a time limit within which they must take action. And to make it credible, your should let the offer expire.
3. Use Booster Rewards: These are a great way to encourage action, particularly when the extra rewards are only available for a short period of time.
4. Use Gamification and tiered rewards: By using these psychological principles you can encourage action and, in particular, repeat action.

Next Steps

We’ve generated a wealth of knowledge having powered over 250 enterprise referral programs across the globe over the last decade. We’d love to share what we’ve learned with you. Please feel free to get in touch if you’d like to learn more.