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Gamifying E-Commerce: Gaming and Social-Networking Induced Loyalty

September 20, 2012 • Business Mobility & E-Commerce, Marketing & Consumers, STRATEGY & MANAGEMENT, TECHNOLOGY

By Yasmin Razavi, Bernard Ho and Mark S. Fox


Introduction and Motivation

Customer loyalty has been an ongoing concern of retail companies and with the onset of the internet it has become even more important. The internet has led to decreasing loyalty among consumers due to price transparency and the ease of switching from one online store to another compared to typical brick and mortar stores.1 The price for retaining customers has risen and doing so has become exceedingly difficult.2

The internet has made it easier for people to connect with one another. Physical distances and boundaries have dissipated and friends and individuals are more connected with social tools such as Facebook and Twitter.3 Online forums have been fostering the development of people sharing thoughts on products they have bought, or providing advice for individuals interested in purchasing a product or service. However, these forums have yet to reach their full potential of direct integration with e-commerce platforms and explicitly driving online sales. The successful integration of the aforementioned entities hinges on incentivizing users to create and consume product-related content in a revolutionary manner. This paradigm shift can effectively be catalyzed and enforced through a new concept: gamification. This article explores how loyalty has changed in the internet era and how gamification applications in e-commerce can induce e-loyalty amongst consumers.


What is Loyalty?

There is no widely accepted definition of loyalty. The commonly understood definition would solely be based on the repeat purchases from a particular brand; however, more recently loyalty has been viewed from three varying angles: loyalty as an attitude, loyalty as a behaviour and loyalty as a function of circumstance.4

Attitudinal loyalty revolves around the customer’s belief and attitude towards a brand.5 Apple Inc.’s highly controversial ‘Mac vs. PC’ marketing campaign is an example of the effort made by Apple to instigate a sense of belonging to an elite or exclusive community in their customers.6

Behavioural loyalty is expressed by repeat purchases of a brand that is not a result of one’s positive attitude toward it.4 For example, a bank’s clients keep their business with a particular institution not because it necessarily provides a superior overall service or rate, but because it would be cumbersome to close their accounts and transfer all their funds to another institution.

The final conceptualization of loyalty is loyalty as a function of circumstance. This model describes that customer loyalty is only derived from the customer’s circumstance when purchasing a product.5 Customers that consistently shop at budget brands such as Walmart or Dollarama due to budget constraints show signs of circumstantial loyalty.

In  addition to the aforementioned types of loyalty, there is loyalty as a function of incentives. A retailer may want to increase a customer’s expenditure on particular products by providing incentives—monetary or otherwise—to encourage that behaviour.7 As early as 1896, S&H Green Stamps offered a rewards program where green stamps were given out with purchases at supermarkets, retailers, etc. and redeemable for products in their catalogue. Air Miles (airmiles.ca) is a more recent example where members collect points by purchasing items from participating companies and later on redeem their points for rewards.8


How has Loyalty Changed with the Internet Age?

With the internet gaining in popularity over the past two decades, buying products online and having them shipped to the purchaser’s preferred location has seen steep growth. The number of individuals with access to the internet around the world has been steadily rising and through globalization, it has become exceedingly easy to tap into international retail markets—over 80% of online users have purchased an item over the internet.9 With this migration to the internet from the typical brick and mortar stores, how has the loyalty landscape evolved?

One of the biggest challenges in the e-commerce setting is the issue of price transparency available to consumers. With the brick and mortar model, the physical distance between the stores made price comparisons a costly trip—both in terms of shoppers’ time and gas. The internet, however, has enabled consumers to navigate the web and instantly compare prices between online retailers from the comfort of their own homes.

Similar to price transparency, the internet has allowed prospective buyers to access and read reviews online. While recommendations and review catalogues were available in the pre-internet era, they are certainly more easily accessed today with 62% of online customers seeking an online review before purchasing an item.10 The flaws and negative reviews of a product are now much more prevalently outlined and made accessible to potential consumers, preventing millions of potential transactions daily.

The cost to acquire customers has risen with the internet age as well. With the deluge of advertisements and a plethora of products and services available, it has become harder to reach and capture potential consumers.11 The former model of making a customer aware of a product through radio spots and TV adverts are no longer on par in terms of effectiveness with reading a third-party product review on the internet.

The final challenge is the issue of trust. Bain & Company has identified that consumers need to be more trusting today when purchasing something online than ever before.12 Relaxed exchange policies and high levels of customer service are increasingly demanded by customers and as such, it is imperative for online retailers to stay competitive within these realms, and gain and maintain customers’ trust by providing an exceptional sale and after-sale experience.

Sharing information has become a modern day task in the 21st century and finding information online has also become a habit for consumers. Online sites such as Facebook and Twitter have grown increasingly popular over the last decade as a medium to share thoughts and opinions.13 These users share five billion pieces of content (news, links, photos, etc.) weekly and increasingly, they share their views on recently purchased items for other would-be buyers to access.14 It has become commonplace for individuals to visit Consumer Reports before buying a car, or to check Yelp before visiting a restaurant. The desire to know more about a product before purchasing has become ever apparent with the help of the internet and its active communities.

While the introduction of the internet has posed a number of challenges to retail companies, the models for customer loyalty has arguably stagnated. Organizations will need to adapt to the internet age and embrace its new sets of challenges and opportunities in order to thrive in the online landscape.


Gamification

What is Gamification? Gamification is often referred to as the application of game elements such as reward points, levels and badges to non-gaming environments to encourage a desired set of behaviors and engagements in a large community.15 In the context of the internet, loyalty is no longer purely driven by the number of transactions made on a particular website. Rather, frequent visits to the website, the number of referrals made as well as the number of positive online reviews made are all indications of brand loyalty. There are various types of user engagements that can give way to important analytics and insight into customer demographics and these engagements can be triggered and maintained through elements of gamification.16 The structure of the gaming elements can be designed to best meet the needs of the game host. Successful design and application of a game, therefore, hinges on clearly identifying the objectives of the host and the types of user behaviors the game is intended to induce.17

Gamification as an industry has received noticeable attention over the past year, receiving $100 million dollars of investment by US companies according to M2 Research.18 This number is projected to reach a level of $2.8 billion by 2016. Further, the research firm Gartner estimates that 70% of large companies will incorporate some form of gamification applications as part of their internal or external operations. Foursquare is often renowned as the pioneer of gamification by creating a purely badge-and-point driven ecosystem where users “check-in” to local stores and connect with friends and peers to receive new points and escalate on Foursquare’s leaderboard.19 In addition, members can receive location-based promotions or activity-based offers while logged-in to the Foursquare mobile application. The combination of this game-fueled ecosystem with the potential of non-virtual offers has made Foursquare a dominating player in the location-based, mobile social market.

Successful design and application of a game hinges on clearly identifying the objectives of the host and the types of user behaviors the game is intended to induce.

A recent and notable example of larger corporations engaging in gamification to draw consumer loyalty is the partnership between American Express and Foursquare.20 This partnership rewards “checked-in” users on Foursquare with redeemable American Express credits at participating locations such as Whole Foods, H&M and the Starwood Hotels. Edward Gilligan, the Vice Chairman of American Express, told the New York Times that in the pilot run of the program, participating customers spent 20% more than those who did not participate.

Another example of gamification would be an idea generated by Kevin Richardson, a game designer at MTV San Francisco, who incorporates game elements to stimulate responsible driving behaviors. Drivers who pass a speed camera with an acceptable speed are automatically entered into a lottery with monetary winnings. This lottery is funded by the proceeds from ticketing over-speed drivers. The program was piloted for the first time in Stockholm and yielded a 20% reduction in average driver speed.

The above examples seek to demonstrate how gamification elements can change users’ behaviours in non-game contexts. Game induced loyalty differs from traditional means of creating loyalty by adding two main dimensions to the experience: publicity and excitement. In a traditional loyalty program, users gain points by engaging in a set of predefined activities and, as a result, elevate from one level to another. However, this accumulation of points and the achievement of new levels and statuses remains confidential between the user and the loyalty program provider with little room for public display. The gamified loyalty model creates communities of users who publicly compete for points and seek higher levels and statuses. In addition, the offline loyalty models are constructed in a mechanical way where each user has full knowledge of the exact number of points they will receive for purchasing an item. There is no element of mystery or excitement involved in this approach. Contrary to the traditional offline approach, there is a great degree of uncertainty and excitement involved in the gamified models. Users can unexpectedly receive badges that reward certain behaviour or receive varying amounts of points for engaging in the same activity. The combination of increased levels of excitement and public recognition makes the gamified loyalty model a much stronger platform for engaging users and shifting behaviours online.


Gamified E-Commerce

The New System
Given the competitive landscape of the online world and the challenges introduced with respect to inducing trust and loyalty, the leap will belong to those online businesses that understand the power of peer-driven recommendations in customers’ purchasing decisions as well as those who take advantage of modern gamification elements to increase customer engagement with their platforms.

In short, the future of e-commerce lies in the creation and implementation of game-driven communities on the large online retailers’ websites or 3rd party websites for smaller retailers. In such platforms, users will have access to a curated list of reviews and recommendations made by other members of the community for each product. This will create the same level of trust in the receiver of the review as neutral recommendations from independent forums. Points and badges will be rewarded for a variety of activities on the platform such as: creating product reviews, answering real-time questions raised by other consumers, aiding with transactions made by other users, identifying the most truthful reviews for a product and ultimately making purchases on the platform.

Over time, based on the user’s engagement and activity on the website, he or she will reach varying levels of expertise in a specific or variety of topics. For example, a user that routinely participates in reviews and discussions of mobile devices could be categorized as a “mobile guru” and another user that contributes to a large number of product reviews could ultimately reach the level of “advanced reviewer.” From a consumer’s perspective, these titles will help identify and seek relevant experts for each of their potential product purchases. This user categorization is specifically critical to platforms such as Amazon or Zappos that offer a wide range of goods. Furthermore, it will help recognize the most credible review, or set of reviews, for a product based on the level of expertise of the reviewers. On the other hand, from a reviewer’s perspective, there is excitement involved in the public receipt of points and badges and unlocking of new levels of expertise based on their contributions to the website. The following gamification elements are particularly recommended to maximize engagement and other desired user activities on an online retailer’s website: ranks, badges or virtual points, and public statuses.

Game induced loyalty differs from traditional means of creating loyalty by adding two main dimensions to the experience: publicity and excitement.

Leaderboards
A user’s rank on the website is purely a function of their previous engagement history with the platform. Over the course of a user’s lifetime on the website, they can accumulate various numbers of points by participating in activities such as leaving product reviews, answering questions to other users, facilitating good transactions and being an active member of the community. Each activity corresponds to a certain amount of points. These points will build the foundation for a ranking formula that tracks all users’ activities and as such places them on various levels of expertise against one another.

A natural progression to developing ranks and ranking formulas would be the creation, and public display, of leaderboards. Leaderboards could be category specific such as Golfing or Basketball on a sport equipment platform, or general to reflect the overall activity of users on the website. Leaderboards will serve two purposes: giving new users quick access to topic-specific experts, as well as publicly rewarding experts for their contributions on the website. Further, it will create an incentive for non-leaders to aim for spots on the leaderboards. Samsung is an early adopter of gamification for increasing online customer loyalty and has effectively used ranks and leaderboards as part of its Samsung Nation initiative.21

Badges
Another form of rewarding users for engaging on the platform would be through badges that reflect various achievements and milestones of activities. The notion of badges was proven to be very successful with Foursquare in increasing the number of “check-ins” at varying locations. Similar to Foursquare, a member of the e-commerce community could receive a badge for making his or her first purchase on the website, for breaking the milestone of leaving 20 product reviews or for receiving endorsements from 10 other users on the platform. Ultimately these badges could be turned into targeted discounts and promotions, invitations to exclusive online events, or even monetary prizes to show gratitude to the most contributing members of the community.22

Public Titles and Statuses
Publicly announced titles and statuses are another way of humanizing the community. The platform will carefully track each user’s activity as well as categories of items they spend the most time viewing. Analysis of such information will yield an accurate sense of what the main interests of each member of the community are, as well as how advanced their knowledge of those respective fields may be. For example, a member of the community that frequently views furniture will be labeled as interested in interior design. If their activity on the platform also suggest that they are in fact experts in this field—through leaving accurate product reviews and receiving endorsements from other members of the community—then in addition to their title as a member interested in interior design, the platform will add a descriptive measure of their expertise such as “Advanced.” On the other hand, another user with similar interests but less involvement in the community may be categorized as a “Novice.” These public statuses will help members of the community identify others with similar interests, identify those with a complementary set of expertise and, ultimately, facilitate more profound interactions and discus- sions. For example Viafoura, an audience engagement plat- form for digital publishers, uses titles such as “Investigator” or “Contributor” to distinguish between varying levels and types of user activity on a news publisher’s website.23

The Game Revolution
The system as described combines the elements of gamification, online recommendations and interactions to drive repurchase behavior or loyalty. The gamified system will be able to target attitudinally and behaviorally loyal customers though various traits of the system. The community aspects of the game-driven model help institute attitudinal loyalty when users participate in discussions, read and write reviews, and witness their public rankings improve. The effort involved in building and maintaining an online presence in such e- commerce platforms limits the users’ activity and interest to a few online retailers and, therefore, creates windows of opportunities for creating behavioral loyalty. Lastly, the opportunity to collect redeemable badges, points, and non-virtual prizes also helps attract the incentive-driven customer types.


Conclusion

The onset of the internet has brought ample opportunities as well as significant challenges for online retailers. Trust, abundance of information and transparency of price are the three main inhibitors to creating customer e-loyalty. The impact of independent online communities in facilitating or preventing transactions are ever more powerful today, but are often over-looked by leaders of online businesses. The success of any online retailer relies on its ability to instil a sense of community, trust and, ultimately, loyalty amongst its customers. The brands need to reunite themselves with the consumers and reviewers of their products, and create a seamless and genuine shopping experience for their users. The days of flipping through poorly aggregated reviews of products on independent websites are behind us. There needs to be only one shopping destination, one list of online reviews and one click to add to the cart. Congratulations, you’ve won a new prize! Welcome to the era of game-driven e-commerce.

About the Authors
Yasmin Razavi
graduated from the University of Toronto with a degree in Industrial Engineering and a focus in Operations Research. She is currently working at McKinsey & Company in Toronto.
Bernard Ho
is a recent graduate of Industrial Engineering at the University of Toronto. He will be joining Accenture’s Management Consulting practice in Toronto later this year.
Mark S. Fox
is a Professor of Industrial Engineering at the University of Toronto. In 1983 he co-founded Carnegie Group, an Artificial Intelligence software and services company. In 1993 he co-founded Novator Systems which pioneered B2C eCommerce software and services and whose clients included FTD, Interflora and American Express. (msf@eil.utoronto.ca, +1-416-978-6823)

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