Rafi Mohammed writes for Havard Business Review.  Recently, he wrote about his reasons for recommending that clients abolish their loyalty programs in all but three cases.

There’s nothing wrong with writing opinion pieces on a blog. I do it all the time. As a loyalty and engagement strategist, though, I  am careful to distinguish my gut opinion from my professional recommendations.  When recommending a strategy, I try to cite hard evidence.  I cringe when a business strategist makes recommendations based on . . . pure opinion.

Mohammed arrived at his professional recommendation through a little research: he asked his mother if she’s frequents a restaurant (Subway) more often because of its loyalty program. “No,” she told her son, “but it’s nice of them to offer it.”  [source]

There are two big flaws in Mohammed’s opinion of loyalty programs: the weak science he relied upon, and the strong science he ignored.

Weak Science

The survey method is better than nothing, but asking someone to predict his or her future behavior is something of a crap shoot.  Most people don’t really know how they’ll respond to an offer. For example, UCLA researchers Lieberman and Falk showed that fMRIs  are far more accurate than surveys in predicting future behavior.

And Mohammed’s survey lacks rigor because the sample size is just one.  Daniel Kahneman points out the problems of small samples in his recent book, Thinking, Fast and Slow, with this exercise:

1. The US counties with the highest incidence of kidney cancer are rural, mostly white, and mostly Republican.  Why do thing that is?

2. The US counties with the lowest incidence of kidney cancer are rural, mostly white, and mostly Republican.  Now explain that.

The explanation is small sample size.  Extreme events are more likely in smaller samples than in larger.  By relying on one person’s unreliable prediction of her own motivation, Mohammed has disguised his opinion as hard fact. 

Strong Science 

Mohammed’s recommendation to ditch loyalty programs ignores good science.

Mohammed states that buy 8 get one free offers do not drive behavior.  But a famous experiment at University of Southern California demonstrates otherwise.

In the experiment, customers of a car wash were randomly given one of two loyalty cards.  One card offered a free wash after 8 paid washes.  The other card offered a free car wash after 10, but the first two slots were already punched.  Both groups needed to buy 8 washes to complete the card.

The group with the head start was more likely to complete the card than the other group (35% to 20%).  Of those who did complete the card, the group with the head start finished faster, meaning their frequency was higher. [source]

Mrs. Mohammed Proved Her Son Wrong

What bothers me most about Mr. Mohammed’s piece, though, is its implication that short-term profits are all that matter. He complains that his clients squander money by offering loyalty discounts–money they should be keeping for themselves.

A 5% loyalty discount — $5 off a $100 sale — results in a 50% decrease in profits. The costs remain the same, but instead of earning $10 from the sale, profit is reduced to $5. What appears to be a small discount — in this case, 5%, — can significantly impact profits. It’s important to share with your front-line workers how costly these discounts can be to the company’s bottom line.

Yet, his only evidence that loyalty programs don’t work–his mother’s testimony–demonstrates the true value of the program.

“[I]t’s nice of them to offer it.”  

Even if the loyalty card fails to increase Mrs. Mohammed’s frequency, she’s not going to the competition! The merchant in Mohammed’s example above would probably prefer his $5 profit to no profit at all.

Here’s what it all boils down to.  The USC study, and similar studies at University of Pennsylvania and elsewhere, demonstrates that Mohammed’s mom doesn’t speak for most of us.  The UCLA fMRI study says Mrs. Mohammed may not even speak for herself.

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2 thoughts on “Why HBR Strategy Blogs Can Be Bad for Business

  • June 22, 2012 at 11:06 pm
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    Bill, as someone who’s designed a fair number of loyalty programs — and analyzed and consulted on many more — this was the point that struck me the most: “He complains that his clients squander money by offering loyalty discounts–money they should be keeping for themselves.” His argument, if I understand it, completely over looks the most fundamental tenet of a well-designed loyalty strategy — namely, that it should drive incremental profit for the company. If your loyalty program investment isn’t making you money, then dump it. But the best programs do make money, and that’s why brands continue to invest in them. This is demonstrated most effectively through comparison of customer spend behavior pre and post program engagement (not, however, by comparing the spend levels of program members vs. non-program members — a common analytical mistake in the industry).

    Reply
    • June 23, 2012 at 12:51 am
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      Thanks, Barry. Great point. I agree that Rafi misses the point of loyalty programs. Thanks for pointing out that analytics is key to determining the value of your loyalty program. Even with great analytics, though, you should shoot for a sample size of greater than one. :-)

      Reply

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