Loyalty programs are one of the established and well-known customer retention marketing strategies. Millions of brands across industries leverage reward programs to influence customer behavior and build loyal customer bases.
Research shows that up to 81% of customers tend to stick with a brand that provides a reward. But what exactly makes loyalty programs so successful? The straightforward answer is in psychology.
Knowing the psychology behind loyalty, including what motivates loyal customer behavior, is a game changer for any business. In reality, most companies want to build lasting, trustworthy relationships with their consumers. The reason behind this desire is straightforward. A loyal customer regularly buys from a business, recommends it to family and friends, and defends it when it comes under fire.
Building a loyal customer base is essential to business success. If a business does not have customers who continue to buy its products, it won't survive. Successful companies leverage loyalty programs to keep their customers coming back.
Reward programs speed up the loyalty life cycle, influencing a new customer to behave like a tenth-year customer. Businesses can take advantage of the psychology of customer loyalty to build a loyal customer base.
At Yollty, we often discuss many techniques businesses can use to build brand loyalty and increase customer retention. This article deepens the psychology behind loyalty to help business owners understand what drives loyal customer behaviors.
What is a Loyalty Program?
A loyalty program is a reward initiative by a brand that provides its customers exclusive benefits based on their previous purchases. Businesses implement loyalty programs to retain customers by providing discounts, rewards, or other unique incentives. They offer customers rewards for their brand or store loyalty to promote repeat business.
The objectives of a reward program can differ from one brand to another. One may strive to entice customers with discounts or cashback, while another might choose to reward them for placing repeat orders. Regardless of the purpose, all loyalty programs aim to maintain closeness with clients by fostering and enhancing brand loyalty.
Nearly all businesses rely on loyalty programs as their foundation, but to be competitive, they must constantly innovate. Customer perception is essential, and to appeal to consumers' attitudes, businesses can customize their reward programs, customer engagement strategies, and more.
Rewards offer clients what they want in exchange for returning to purchase your products. Thus, rewards are the most direct way consumers appreciate your brand.
Why Should a Business Create a Loyalty Program?
According to recent customer loyalty statistics, 75% of customers choose a business that has a rewards program. Customers are happier and more likely to stay with a company if they feel appreciated. The customer retention process is as good as the more extended customers remain.
Acquiring new clients is not easy because it is money and time-consuming. Therefore, any business should work hard to retain existing customers. A great way to do that is to implement a loyalty program.
When a company offers a rewards program, it incentivizes its regular consumers to spend more money and make more purchases to receive rewards. Consequently, the firm earns enormous profits.
With the right reward plan, it would be best if you realized significant improvements in customer lifetime value and product sales. A correctly implemented loyalty program and its incentives empower a business to develop customer relationships and increase retention. Customer loyalty builds trust and enhances a company's credibility and transparency.
You can lower your consumer churn rate simply by running a reward program. Returning consumers tend to spend more money on a business. Once you have a solid clientele of devoted customers, you may easily attract new ones. Research shows that 83% of consumers believe in referrals from friends. That means happy consumers spread the word for free. They tell their friends about your business and its wonderful products and customer experience.
That said, understanding and utilizing psychology will help your business succeed in the short term and over the long term.
The 6 Psychology aspects Behind Loyalty Programs
A customer's willingness to join a loyalty program is influenced by a program's simplicity and reward quality. But these are not the only motivating factors. Many psychological aspects influence a customer's decision to participate in a reward program. Let's take a look at several of them.
- Creating new behavior through positive reinforcement
Positive reinforcement establishes or encourages a behavior pattern by providing a reward after the desired behavior is exhibited. It includes associating a positive result with a particular action, increasing the likelihood that the individual will repeat the behavior to experience the positive effect.
Once customers exhibit profitable behavior, such as purchasing a product, businesses offer them special rewards. Subsequently, customers quickly recognize how their actions are connected to the benefits they receive. In other words, they become accustomed to relating specific behavior or activity with a reward.
Positive reinforcement helps to build and drive consistent and lasting behavior patterns. For instance, you can reward loyal customers whenever they visit your restaurant and enjoy a great moment. Yollty can help you put positive reinforcement into practice if you are busy creating excellent products and managing your establishment.
- Capitalizing on the endowment effect
According to the endowment effect, people are more inclined to keep something they already own than to buy it if they don't. In other words, it's an emotional bias that makes people place a higher, usually unreasonable, value on an item they own than its market value.
The endowment effect is best explained by the fact that you might possess something that you wouldn't sell for less than £50. However, you might not purchase the same item for more than £30 if someone offered to sell it.
Wondering how the endowment effect relates to a loyalty program? Well, people perceive a loyalty card without stamps on it as useless. However, a loyalty card with stamped squares changes how individuals view the reward system. This is because a card gains value as it progresses in the reward system.
Moreover, the common observation is that a business can build registrations faster by rewarding customers who sign up for its loyalty program. A signup incentive might be just what you need to make customers feel they have made progress. This move also demonstrates that your interest is establishing customer relationships and not simply getting customers to buy your products or services.
- Leveraging the goal gradient effect
Goal anticipation is another strategy that encourages customers to participate in a rewards program. According to the goal gradient effect, people will put more effort into accomplishing a goal as they get closer to it. Customers who are aware that they are getting close to a rewarding target will make profitable actions such as often purchasing, which translates into increased customer loyalty.
As your customers make progress toward the reward, the goal gradient effect principle suggests that their purchase intervals will shrink. So, it's important to reveal to customers their progress. If they see they are progressing towards attaining the next reward, they will more likely make frequent purchases and stay committed.
The Yollty team believes in making your rewards achievable and relevant. This is because the psychology of the goal gradient effect can undo your loyalty program. For example, your customers may perceive your reward as not enticing or challenging to attain. Subsequently, their transaction interval slows down, leaving your business with lapsed customers.
- FOMO (Fear Of Missing Out) - Loss aversion
Loyalty programs and other marketing strategies frequently use loss aversion to increase member engagement. Businesses may give participants something they feel a sense of ownership over and value. Subsequently, they set up conditions under which members may lose that ownership.
For example, members might lose their privileges if they don't accumulate enough status credits. They might have their ownership removed if their members' points expire because of failing to participate in the program regularly. Some might fear spending more points if they don't book early enough.
This might serve as a motivational force that keeps participants active in the program. Loss aversion is frequently used in loyalty programs to elicit an immediate response from customers. People change their behaviors to avoid experiencing unpleasant emotions. For this reason, practically every business announces a sale that is "ending soon," even if it isn't ending soon. This compels customers to buy immediately rather than wait.
The loss aversion strategy doesn't imply that you always want to take offers away from clients. The successful use of loss aversion means knowing precisely what your clients are worried about losing and why and offering them a way to prevent loss.
- Continuous Investment and Creating Personal Attachment
As people invest more and more money, time, or effort into something, they tend to regard it more highly. Everyone values their effort more than that of others. According to the psychological concept of "escalation of commitment," you attach more value to something as you put more effort into it.
You may compensate customers with loyalty programs for spending more time within your establishment or money on your products, or services. As a result, customers will appreciate your establishment more. In addition, you will realize a decrease in turnover and an increased willingness to pay more.
Therefore, if your business successfully retains consumers with a great loyalty program, why not consider ways to make the customer's experience more unique? For example:
-Reward them based on their individual preferences
-Allow some level of product customization
-Let customers choose how they earn points and incentives
With a more personalized loyalty program experience, customers feel as if they are part of it. This feeling enhances their emotional bond with your brand.
- Exclusivity and elevating social stators
Everyone enjoys gaining social credibility. One of the primary motivating factors for joining a loyalty program is to improve social status. People enjoy standing out from the crowd and achieving a higher reward tier to access better advantages. That explains why VIP programs are so successful.
You may separate your best clients from average ones to create an elite status that is exclusive to your business. That way, you instill a sense of achievement in customers who achieve this status. Customers yearn for the benefits and rewards of testing new products, skipping lines, and so on. These experiential rewards resonate with many customers more so than freebies and discounts. Additionally, they offer a kind of social currency that consumers may share with their peers on social media.
With an elevated social status, clients have the impression that your reward program is exclusive. To encourage customers to claim their status before the deadline, you may consider a rewards structure where the customer's progress resets at the end of a specified period.
Final Thought
These psychological factors greatly influence the success of your reward program. It is an evidence that any business seeks to retain its existing customers while attracting new ones. But the how is the tricky part? Leveraging psychology is a precious step toward that goal. This involves reviewing your reward proposition to make it highly valuable.
Understanding your consumers' cognitive biases enables you to influence them profitably while still providing them with a valuable service or product. Your goal should be to run a loyalty program that continually allows customers to enjoy their rewards. To do that, you need to understand better how your consumers think and what they consider valuable.
Customers who return to your store regularly are the most important. Keeping your current customers is much less costly than acquiring new ones. You can encourage them to return to your establishment by rewarding their loyalty. Now that you know rewarding your loyal customers is essential, why not take action immediately?
Use the Yollty digital loyalty card to reward your customers and make them happy after each transaction. Yollty offers simple yet powerful features that allow you to simplify and digitize your reward program.
