Linearity of loyalty rewards

So I’ve taken to working a lot in cafes nowadays. This is driven by both demand and supply. On the one hand I’ve gotten so used to working for my current primary client from home that I’m unable to think about other work when I’m at home – so stepping away helps.

Also on the demand side is the fact that this summer has been incredibly hot in London – houses here are built to trap in the heat, and any temperature greater than 25 degrees can become intolerable indoors. And given that cafes are largely air-conditioned, that’s an additional reason to step away from home to work.

On the supply side, there are three excellent hipster cafes within 200 meters of my house. Yes, I live in a suburb, though my house is very close to the suburb’s “town centre”. And all all these cafes make brilliant coffee, and provide a really nice ambience to work.

So far I’ve discovered that two of these cafes offer loyalty cards, and given my usage, neither makes a compelling reason to be loyal enough. The “problem” (in terms of retaining my loyalty) is that the loyalty card at both these places offer “linear rewards”.

Harris+Hoole has an app, which offers me a free drink for every six drinks purchased. Electric Coffee has a physical card, which offers me a free drink for every ten drinks I purchase. Now, the rate of reward here (I’m writing this sitting in Electric) is lower, which suggests that I’m better off patronising Harris+Hoole, but some variety doesn’t hurt – also I’m queasy about ending up and parking in the same cafe more than once in a day.

Even when I was writing my book in Barcelona two years ago, I would never go to the same cafe more than once a day, alternating between Sandwichez, Desitjos and this bar whose name I could never figure out.

Ordinarily, if I were a low intensity user, one drink for every N drinks ($math 6 \le N \le 10 $) would have been a sufficient reason to be loyal. Given my rate of consumption, though, and the fact that I go to both these cafes rather often, the incremental benefit in staying loyal to one of these cafes is fairly low. I can peacefully alternate knowing that sooner or later the accumulated ticks on my card or app are going to provide their reward.

It wasn’t like this last year, when I was briefly working for a company in London. Being extremely strapped for time then, I hardly patronised the cafes near home, and so the fact that I had an Electric card meant that I stayed loyal to it for an extended period of time. At my higher level of usage, though, the card simply is not enough!

In other words, rewards to a loyalty program need to be super-linear in order to retain a customer beyond a point. The current linear design can help drive loyalty among irregular customers, but regulars get indifferent. Making the regulars really loyal will require a higher degree (no pun intended ) of rewards.

PS: Given the amount of real estate hours I occupy for every coffee I buy, I’m not sure these cafes have that much of an incentive in keeping me loyal. That said, I occasionally reward them by buying lunch/snacks or even a second coffee on some visits.

PS2: As a consumer, loyalty card versus app doesn’t make that much of a difference – one clutters the wallet while the other clutters the phone (I don’t like to have that many apps). A business, though, should prefer the app, since that will allow them to know customers better. But there’s a higher fixed cost involved in that!

 

Missing BRacket

Last night then-classmate now-colleague Baada and I were having a long bitchy conversation, mostly carried over text messages (SMS). As the conversation developed and grew in intricacy, several threads developed. This is not unusual for a conversation with Baada – it usually takes on several dimensions, and it always helps having a mechanism to keep track of all the threads simultaneously.

That’s when we realized how much we miss BRacket, the local instant messaging system we had at IIMB (a version of DBabble). I might have written this before but the beauty of BRacket was that conversation was “offline”. There was no chat window, and you would reply to individual messages, like you would in email. While on one hand this allowed “offline conversation”,i..e. the conversation didn’t die if one person respond immediately like it can happen in Y!M/GTalk, the more important thing was that by having conversation history in each thread, this allowed for some serious multithreaded conversation.

While instant text messaging offers the former feature (you can reply to a message several hours later and still continue the conversation), the latter feature is lost. There’s no way to keep track of threads, and like a bad juggler you soon end up losing track of half the threads and the conversation peters out.

I don’t know if DBabble is still widely used elsewhere but it’s death knell in IIMB was sounded when Sigma (the student IT club) in its infinite wisdom allowed for a “chat mode”. Along with the conventional offline messaging system, it also gave the option of Y!M style chat windows. And having been used to Y!M, batches junior to mine started using this chat feature extensively. The immediate rewards of using it were huge – no need to hit “send” (I’ve even forgotten the keyboard shortcut for that), no need to open a new message each time it arrives, and so on.

While we held up the virtues of “old BRacket” (like i used to refuse to reply when juniors pinged me in chat mode. A notable exception being the famous “Pichai files”) there was no one to do that after we graduated. I’m told that the incoming batch of 2006 exclusively used chat mode. The two major advantages that BRacket offered over “window chat” were gone. GTalk came up sometime around then, and with its better and faster servers (the IIMB network was notoriously slow) it could easily offer as good if not better services than BRacket. It was clear then that BRacket would die.

I’m told that now no one uses BRacket. I don’t even have it installed on my last two computers. Unfortunately no other “offline-messaging” technology has quite caught on since then. And so I miss multithreaded conversation. It’s very sad, I tell you. I wonder if even DBabble is still used extensively.

It’s fascinating how some technology dies. You come up with a purported “improvement” which offers short-term gains, and catches people’s fancy. While people flock to the “improved version” in hordes, it turns out that the features that made ┬áthe original version so popular are now lost. And this new version has competition, and so the technology itself gets killed. All because of some purported “innovation”.

The Eighty-Twenty Rule

I first got this idea during some assignment submission at IIT. One guy in our class, known to be a perfectionist is supposed to have put in 250 hours of effort into a certain course project. He is known to have got 20 out of 20 in this project. I put in about 25 hours of effort into the same project and got 17. Reasonable value for effort, I thought. And that was when I realized the law of diminishing returns to effort. And that was the philosophy I carried along for the rest of my academic life (the following four years).

The problem with working life as opposed to academic life is that the eighty-twenty formula doesn’t work. The biggest problem here is that you are working for someone else, while you were essentially working for yourself while you wree a student. Eighty was acceptable back then, it is not acceptable now. Even if you are working for yourself, the problem is that the completion-rewards curve is completely diffferent now.

Imagine a curve with the percentage of work done the X axis and the “reward” on the Y axis. In an academic setting, it is usually linear. Doing 80% of the work means that you are likely to get 80%. Fantastic. The problem wiht work is that the straight line gets replaced by a convex curve. So even to get an 80% reward, you will need to maybe do 99% of the work. The curve moves up sharply towards the end so as to give 100% reward for 100% work (note that I’m talking about work done here, not effort. Effort is irrelevant)

Now, why did I cap reward at 100% in the previous paragraph? Why did I assume that there is a “maximum” amount of wokr that can be done? Note that if there is a ceiling to the amount of work to be done, and to the reward, then you are looking at a payoff like a bond – the upside is limited – 100% but the downside is unlimited (yeah I know it’s limited at 0, but it is so far away from 100% that it can be assumed to be infinitely far away). Trying hard, doing your best each time, the best you do is 100%. But slip up a bit, and you will get big deficits. It is like the issuer of the bond defaulting.

Almost thirty years back, Michael Milken noticed this skewed payoff structure for bonds, and this led him to invent “junk bonds”, which are now more politely known as “high yield debt”. Now, these bonds were structured (basically high leverage) such that a reasonably high rate of default was built in. In an ordinary bond the “default expectation” is that the bond won’t default at all. For a high-yield bond, the “default expectation of default” is much higher than 0 – so there is a definite upside if the bond doesn’t default. So that balances the payoffs.

So how does that translate to work situations? You need to basically get yourself a job where there is significant scope for doing “something extra”. So that if you take into account the “something extra”, the “expectation” will be say something like 90% of the work. So by doing only a bit more than your old 80-20 rule from college, you can fulfil expectations. And occasionally even beat them, resulting in a major positive payoff (either in terms of money or reputation or power etc.).

The deal is that when the expectation is lower than 100%, the reward-work curve changes. It remains heavily convex for the duration within the expectation (so if expectation is 90% of work for 80% of profit, the curve will be highly convex in the {(0,90),(0,80)} area). And beyond this, it gets less convex and closer to linearity, and so gives you a bit more freedom.

I’m too lazy to draw the curves so you’ll have to imagine them in your heads. And you can find some info on convex curves here: http://en.wikipedia.org/wiki/Convex_function