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Dividend Spring 2013 : Page 18

A: STATUS There’s a well-known connection between scarcity and status. The scarcer something is, the higher its status — and the higher the status its owner has. But marketing professor Brent McFerran says this theory breaks down when you look at customer loyalty programs and guests. What happens when VIP programs allow their members to invite a guest? Does the member feel some loss of status because the reward is available to more people? The answers found by McFerran, the Arnold M. & Linda T. Jacob Assistant Professor of Marketing, provide insight for companies running loyalty programs. WHAT ARE YOU THINKING ABOUT? Status, specifically with customer loyalty programs or VIP programs. They’re designed to make the best customers feel special. Feeling special has many positive implications for the company — these customers spend more, are more satisfied with the firm, and share more positive word of mouth. Most of a company’s profits come from a relatively small group of customers. However, many loyalty programs have started to allow people to bring a guest with them, or share rewards with a friend from time to time. You can get upgraded at the hotel, fly first class, get in the VIP lounge, or enter a luxury suite at the football game. In each case, you can bring a guest (or several). But the guest has done nothing to earn this preferential treatment. Nobody has really looked at the consequences of this practice. So I wanted to find out the consequences of extending VIP status to non-VIPs. I find that loyalty members really value it. Furthermore, they are willing to trade scarcity in order to share preferential treatment with friends. They’d rather have six VIP passes out of 30 and bring five friends than have one pass out of five total. Interestingly, this doesn’t make the VIP feel like he or she is losing status. And it drums up another set of customers because the guests get really excited. While VIPs quickly satiate on the rewards that firms give them, the guests feel very special when they get that upgrade. It’s positive for the firm because it usually leads to good word of mouth — like a Facebook or Twitter picture saying, “Hey, look! I’m in the VIP suite!” — and it’s relatively inexpensive. Plus, a new group gets fired up about the brand at a lower marginal cost than it takes the firm to reward a “true” VIP. WHY IS THIS INTERESTING TO YOU? For a couple of reasons. First, there is a well-established relationship between scarcity and status. I show here that it doesn’t always hold. Second, while some firms are doing this, there’s no real research about whether it’s good or bad for the VIP, the guest, or the firm itself. WHAT ARE THE IMPLICATIONS FOR INDUSTRY? It suggests that when you design loyalty programs, it’s not just about your top customers. Recognize your customers derive value from sharing preferential treatment. They will even be willing to trade off some scarcity, and they generally will be pleased. The guests are really happy, often even more so than the “true” VIPs, and this means more people excited about your brand. Understanding when and how to make your top customers feel special is an area where companies don’t have a ton of insight right now, and I think a lot of firms are running loyalty programs in a suboptimal way. PHOTOS BY SCOTT STEWART 18 DIVIDEND SPRING 2013

| - Faculty Minds // What are you thinking about?

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