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What is the Psychology Behind Loyalty Programs?

psychology written on a typewriter

There’s no denying that loyalty programs are effective. According to Bond Brand Loyalty, more than 70% of customers are more likely to recommend a brand if it has a decent loyalty program.

But why is this the case? What is the psychology behind loyalty programs?

At Stamp Me, we frequently discuss the many tricks and techniques you can employ to increase customer retention and brand loyalty, but in this article, we’re going to cover why all these techniques work in the first place.

What is it about rewards programs that appeals to us? By understanding the psychology behind loyalty programs, you can structure yours to maximize results.

The Ultimate Guide to Customer Loyalty Programs

 Learn how to create a successful loyalty program that retains customers and boosts sales.

1. Building New Habits Through Positive Reinforcement

women with umbrella in front of yellow wall

By rewarding specific behaviors (such as making a purchase, referring a friend, leaving a review and so on), your customers grow accustomed to associating that act with the reward.

This is why, in addition to incremental “Buy Six & Get Your 7th Free”-style rewards, it’s useful to introduce some perks that are rewarded every single time the customer does this action.

For instance, every time the customer refers a friend, they each receive a free item. Or every time the customer creates content that promotes your brand in some way (a blog review, a YouTube tutorial or even an Instagram pic showing off one of your products), they receive 25% off their next purchase.

This creates a “continuous rewards” system that exposes customers to positive reinforcement every time they engage with your business – not just every 6th or 7th purchase.

You need only look at loyalty giants like Starbucks and Sephora to see that this approach clearly works. Of course, it also makes your loyalty program more varied and exciting, with a reach that extends to social media… but let’s not try to delve into the psychology of social media here!

2. Capitalizing on the Goal Gradient Effect

basketball shooting hoop

It stands to reason that the closer you get to receiving a reward, the harder you work for it – like when long distance runners are suddenly struck with a renewed burst of energy as they come round that final bend and see the finish line up ahead, for example.

This means that as customers progress through their loyalty card, the intervals between transactions tend to shrink as they grow nearer the reward.

At Stamp Me, we’re big believers in making your rewards relevant and attainable. Why? Because the psychology behind the goal gradient effect can also be your loyalty program’s undoing.

If the customer perceives your rewards to be too difficult to achieve, or not enticing enough, the rate of transactions slows down and ultimately ceases altogether – leaving you with a lapsed customer, not a loyal customer.

It’s also the reason why showing customers their progress is so crucial. If customers can clearly see their progression towards the next reward, they are more likely to stay committed. After all, it’s hardly motivating to run on a treadmill that doesn’t tell you your speed, distance or heart rate!

So, the takeaways here are to offer attainable rewards and keep customers notified of their progress towards them.

3. Leveraging the Endowment Effect

what is the psychology behind loyalty programs

The best way to describe the Endowment Effect is that you might own something that you wouldn’t part with for anything less than $20. However, if someone offered to sell you that same item, you might not be willing to pay more than $12 for it.

In other words, we place a higher value on items we already own, than we do on those we don’t.

You might be wondering how this applies to loyalty programs. Well, so were two consumer researchers by the names of Joseph Nunes and Xavier Dreze, when they conducted an interesting experiment in 2006. Nunes and Dreze distributed 300 loyalty cards at a local car wash.

Half of the cards had eight squares to stamp before a free car wash was awarded. The other half of the cards had 10 squares that needed stamping, but two of them were already stamped.

Technically, the journey to a free car wash was exactly the same for all 300 customers, and yet the experiment revealed that the customers with two pre-stamped squares were almost twice as likely to redeem their reward.

These findings coincide with our own observations at Stamp Me, that businesses which reward customers just for signing up to the loyalty program build registrations three times faster than businesses which don’t.

A simple upfront signup incentive is all it takes to make the customer feel like they have already made progress. It also shows that you value their business, and that you’re more interested in building customer relationships than making single transactions.

Learn more about the 3 Ways to Boost Loyalty Program Signups with the Endowment Effect.

4. Providing a Sense of Status

VIP

A big part of a loyalty program’s appeal is the VIP status it offers. This has always been the case, but it’s grown increasingly prominent with the emergence of social media.

We crave the perks and benefits of skipping queues, attending industry events, gaining early access to new products or “first dibs” on seasonal sales. These experiential rewards resonate with customers far deeper than discounts and freebies.

They also provide a form of social currency that customers can share amongst their friends via their social media channels. This inspires a sense of FOMO, and instils the idea that your loyalty program is an exclusive club – Nordstrom’s Nordy Club is a perfect example of this, as well as NikePlus.

Nike+ Rewards

Image Source: Nike

To incorporate this psychology into your own loyalty program, you might consider implementing a tiered rewards system, where the VIP perks increase alongside the customers’ engagement with the brand.

Also, this sense that greater rewards and benefits are just around the corner ties in with the positive reinforcement factor as well!

5. Creating a Personal Attachment to Your Program

heart on a string

It’s no great secret that we tend to place higher value on things as we invest more and more heavily in them (whether that investment is time, money or effort).

You can apply this thought process to a poker game, a round of golf, or a precariously leaning Jenga tower. You could also apply it to the cake you’ve spent all day baking, the house you’ve spent several years renovating, or the loyalty program that you’re an active member of.

So if your business is managing to retain customers with an enticing loyalty program, why not find some ways to personalize the customer’s experience by:

The more personalized your loyalty program experience becomes, the more the customer feels like they own it and this strengthens the emotional connection between them and the brand.

Understanding what the psychology is behind loyalty programs

what is the psychology behind loyalty programs

By getting a clearer idea of how your customers think and what constitutes value to them, you can structure your loyalty program in such a way that members are consistently satisfied with their rewards experience.

Techniques like Surprise & Delight and Gamification are invaluable tools for leveraging the customer’s psychology behind loyalty programs, and of course it doesn’t hurt to go mobile with a digital loyalty app.

This provides your business with a direct line of communication straight to the customer’s pocket, with a whole host of additional data to gain helpful insights.

Now that you know the psychology behind loyalty programs, it’s time to put this knowledge to good use! Here are some nifty techniques for improving customer loyalty in 2021.

Stamp Me provides loyalty solutions to businesses large and small, from our own Customer Loyalty App to fully customised loyalty and rewards programs for enterprises and brands.

Contact us if you would like to discuss a loyalty or rewards solution for your business or brand.

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