Chicago Booth Magazine Spring 2OO932

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Feature Capital Ideas

33Spring 2OO9 Chicago Booth Magazine

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 Resur-

rected: 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.

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. Going for the

GOALPeople 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

T h e h u m A N P S y C h O L O G y O F R e w A R d S

I

Chicago Booth Magazine Spring 2OO934

Customer rewards programs are a popular way for com-

panies 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 motivat-

ing, 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 ef-

fect 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.

The first experiment looked at coffee purchases by custom-

ers 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 pur-

chases, 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 aver-

age 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 pur-

chases 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

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 com-

pleted 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 goal-

gradient 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 bet-

ter 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, par-

ticipants 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 sec-

ond 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 accu-

mulated toward the 51-song goal the authors also found. Ex-

tending 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.

The Illusion of ProgressThat 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

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

Feature Capital Ideas

35Spring 2OO9 Chicago Booth Magazine

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 participa-

tion 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 abso-

lute 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 differ-

ent 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 com-

pel 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.

It’s All about Motivation“Companies should not necessarily think of a customer

rewards program as just a system for rewarding loyal cus-

tomers,” 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 cof-

fee 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, market-

ers should design one in such a way that people perceive that

they’re getting closer to a reward.

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 pro-

gram. 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

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