The Psychology of Loyalty Programs and Why They Work

Customers 13 minute read 5th October 2020

There are few nicer feelings in life than being rewarded for something.

This is why customers who have an ‘emotional’ relationship with a brand offer a 306% higher lifetime value to the business in question. And that emotional relationship usually comes from a combination of great products, brilliant service and some form of loyalty program that rewards their spending.

When it comes to retention strategies, points programs remain one of the most established and effective marketing strategies available to businesses. What’s more, they’re available to firms in all industries, whether they’re B2B or B2C.

There’s a reason the likes of Starbucks and Hilton invest so handsomely in their rewards programs: they work - big time.

Loyalty program statistics

We appreciate you might need a bit more convincing. After all, how many times have you signed up for a loyalty program only for the brand’s membership card to languish unused in your wallet or purse?

If that’s the case, you really are in the minority - and that’s very good news if you’re a business owner. Here are a few numbers that illustrate why:

  • 90% of customers in the USA believe they have just as much or more loyalty to preferred companies than a year ago
  • 81% of consumers trust recommendations from their friends and family over businesses (loyalty will help drive those recommendations)
  • Engaged customers are 5 times more likely to buy again from a business
  • Acquiring new customers can be up to 25 times more expensive than keeping those who have already purchased (depending on the industry you’re in)
  • On average, loyal customers are worth up to 10 times as much as their first purchase.

Already convinced? 5 Steps to a Profitable Restaurant Loyalty Program

So, why the need for loyalty programs?

Now for a slightly less positive loyalty stat. According to research by HubSpot, over half of customers now trust companies less than they used to.

This probably shouldn’t come as a big surprise. After all, with high profile data breaches forever in the news and questionable practices by big brands regularly highlighted on the front pages, trust is a rare commodity.

It can be gained, though, and that’s why loyalty programs are so important. If you create a loyalty program for your customers which gently welcomes them into the fold and gradually establishes a layer of trust, you’ll reap the rewards.

To stand out in the digital economy, you need to be trustworthy, reliable and completely transparent - and that means delving into the psychology of what makes loyalty programs work.

3 psychological principles behind loyalty programs

The answer to why loyalty programs work lies in the basics of psychology.

The following three principles will drive most people to sign up for loyalty points programs and keep them coming back for more.

1) Motivation to engage

There are few human psychological factors more powerful than motivation. When harnessed, it’s capable of getting us out of bed in the morning, parachuting out of planes and finally completing that university degree.

When it comes to a rewards program, motivation makes customers believe they can achieve something significant, and that pushes them to reach the goal. Another point or tick on a membership card and the reward becomes increasingly within reach.

However, motivation should always be rewarded if trust is to be established between the customer and brand, which is why you’ll need to deliver on any promises you make in your loyalty program.

Related Article: Using People Power to Boost Your Business

2) Reward valuable behaviour

What do you want your customers to do? Buy every upgrade to a product once available? Sign-up to a monthly subscription? Those things become eminently possible if you tap into a loyalty program’s ability to positively reinforce their behaviour.

As noted from the outset of this blog, it feels good to be rewarded, and if you’re rewarded for doing something that ultimately benefits the business in question, everyone’s a winner.

Positive reinforcement of this kind will encourage customers to repeat those same actions in order to benefit from the rewards again, and again.

This creates a solid emotional foundation where your business becomes the first thing to enter their mind whenever they think about buying something within your industry. And that’s brand power you’ll struggle to find via traditional marketing methods.

Related Article: Why It’s Important To Understand The Customer’s Buying Behaviour

3) Inspire long-term commitment

There’s a huge amount of competition these days, no matter which industry you’re in. That makes commitment from customers one of the hardest things to come by.

They’ll switch products or services at the drop of a hat if something better comes along and, thanks to the power of online reviews and social influence, make spur of the moment purchasing decisions without giving you a chance to sell your benefits.

Inspiring long-term commitment is therefore tricky, but not impossible - particularly if you decide to implement a loyalty program.

If you begin building up points on a loyalty program, switching to a different brand suddenly becomes less palatable. It introduces a switching cost, which can secure long-term customers - if you get it right.

Apple are a case in point here. Although not a traditional loyalty program on the face of it, the fact many of their services are baked deeply into their own products and aren’t available on other platforms inspire long-term commitment - not least because they (usually) work so well together.

The threat of losing your loyalty points or that guaranteed free coffee you get each month is often enough to raise your level of commitment to a company. That’s powerful stuff.

Leveraging psychology to create an awesome loyalty program

Now we know the role psychology plays in loyalty programs, how can we use those principles above to create schemes that result in a tangible impact on your bottom line and fuel company growth?

Find rewards your customers need (want)

In order to motivate your customers, you need to give them rewards that actually mean something to them. More importantly, they need to be rewards they want, or which will solve a significant issue they have.

It’s ok to not know what that is at this stage, but you’ll need to do some research. Look at your most popular products or survey your customers. Ask them what it is that you’re not offering at the moment which would put a big smile on their face.

Once you have those rewards ready, make sure you tell your customers about them. That might sound obvious, but it’s far too easy to simply publish the rewards on your website and wait for people to sign up. Instead, be proactive and use social and email communication to force the value of your rewards in front of the people who need them.

Keep rewards progress front-and-centre

If you’re already a member of a big brand loyalty program, you’ll probably be acutely aware of how far away or close your next reward is. Another cup of coffee and then you hit your free cup; one more point and you can save £10 on fuel - they’ll use gamified graphics and language to keep you motivated.

This is why it’s important to always display progress towards a member’s next reward. Psychologically, we’re all inspired by the perception of progress; if something gets nearer based on our efforts, we’ll continue doing whatever we’re asked (within reason) until we reach it.

Demonstrate value up-front

For a rewards program to work, you need to be ultra-clear and transparent about the value it offers.

Humans need to know immediately that their efforts as customers are going to be rewarded and that the reward is of significant value to them.

It might be tempting to make people wait for the reward or drip-feed the benefits of it over time, but the fact is, there is no time to do this. Instead, show the value their business has to you and what you’ll do in return right from the start - that’s how you’ll get new sign-ups to your loyalty program.

Final thought

Before you head off and spend a significant amount of time devising your own loyalty program, it’s worth bearing in mind that loyalty often comes from the simplest of rewards.

It’s thought that 93% of customers are likely to make a repeat purchase with a business that offers excellent customer service. No points programs, membership cards or guaranteed front row seats for being a member; just good, old-fashioned customer service.

Loyalty programs should, therefore, always be the icing on a cake which is constructed of brilliant products and amazing customer service. Get those latter two elements right, and your customer loyalty will build organically; a loyalty program will simply sniff out those who need a little more encouragement.

Further Reading: 5 Steps to a Profitable Restaurant Loyalty Program

Related posts