How to Use Psychology Research to Create a Great Loyalty Program
Learning how mental frameworks affect how consumers perceive your bonus program
There is only one thing better than making a new friend, and that is keeping an old one. — Elmer G. Letterman
The same is true with customers. The only thing better than making a new customer is keeping an old one.
Keep them happy and they’ll recruit the new ones for you.
Keep them hooked and they’ll fight for you.
Your customers are your biggest moat. A loyalty program is a time-tested method to sustain this.
A great loyalty program is so simple that it is hard. It is great when a customer looks forward to spending their money with you instead of a competitor.
And that is precisely why it is hard.
Psychology lends us excellent frameworks to aid us in understanding why people do what they do.
Here are some important ones.
Cognitive fluency is the ease with which our brains process information to generate an understanding. People prefer things that are easy to think about over difficult ones. The feeling of ease is termed cognitive fluency.
Cognitive fluency is critical when it comes to deciding the reward system in loyalty programs. What you pay and what you get should be simple and relatable.
Set # 1 — 1 point for $1
is easier to understand than
Set # 2 — 1 point for $3
The fact that I mentioned ‘Set #2’ and went on to write ‘1 point’ next to it, was jarring in itself.
A cognitive bias where an individual relies too heavily on an initial piece of information offered.
A: Collect two stars for each $1 you spend
B: Spend $1 to earn two stars
Which one is more valuable? A? B? Both?
While both are the same, the anchoring effect bends our bias towards A because of the higher reference number of two.
This is the same reason 4 x 3 x 2 x 1 seems higher than 1 x 2 x 3 x 4.
4 is bigger than 1. 4 x 3 is greater than 1 x 2. The mind has made up its mind.
People tend to prioritise the number of units over the size of the units. (link)
Increase or decrease the unit results, based on benefits or penalties.
Case A: Five stars per dollar. Collect 140 stars for a free coffee.
Case B: Three stars per dollar. Collect 84 stars for a free coffee.
You’ll spend $28 in each case, but the funny brain of ours attaches more value to five stars.
The same reason a 30-day trial sounds better than a 1-month trial. The same reason why a 1-month late fee might sound better than a 30-day late fee.
Endowed Progress Effect
People provided with artificial advancement toward a goal exhibit greater persistence toward reaching the goal.
Do not start your customers at zero points. Give them the welcome bonus. Let's look at a use case directly from a research paper by Joseph C. Nunes and Xavier Dreze, who documented this phenomenon.
Consider reframing a frequency program that requires eight purchases in order to earn a specific reward as a program requiring 10, but with two purchases awarded upon enrollment.
Goal Gradient Effect
As people get closer to achieving a reward they accelerate their behaviour to progress towards the goal.
Clark L. Hull’s research was extensively based on rats in a maze. He noted that the rats moved at a progressively rapid pace as the goal is approached.
This is similar to how runners find untapped energy in the last leg of the race. The final dash.
Consumers will speed up purchases as they reach closer to the goal.
The Starbucks India website mentions —
Free Drink for every 10 Stars
We’ll treat you to a tall drink every time you earn 10 Stars.
The Goal Gradient Effect predicts that people will start buying more as they reach closer to ten stars.
As a marketer, if you can aid people to get their first few stars without friction, they will sprint the last dash and feel great for having paid you money.
This is the tendency to think about uncompleted tasks more than the completed ones. The lack of completion creates a task tension.
This is used generously by page-turning novels and the shows that leave you in between a story.
People were pissed off and frustrated with GoT Season 8. But guess what? 13.6 million people tuned in on the finale, making it the most watched episode of all time in HBO history.
This can be used at sign-ups or upcoming milestones. For example, you’ve completed four out of five steps. Finish the next step to become a member. Unutilised rewards points can be pushed for redemption using this framework.
Bluma Zeigarnik discovered this after her professor noticed that waiters had better recollections of still unpaid orders than the ones that they completed. It’s the reason they don’t seem to write but still serve it perfectly.
Post-Reward Reset Phenomenon
Consumers will work harder to earn incentives as the goal comes in sight, and will slow down their efforts after the goal is achieved.
Tiered loyalty programmes are a great way to counter this particular reset.
Another way is to offer smaller, frequent, and quick rewards, instead of one major goal. This gives them flexibility and control. (Ref: Starbucks — NY Mag Intelligencer)
Favouring members of one’s in-group over out-group members. This is a real differentiator when everything else is the same. The classic example is Apple and the rest.
This is a result of sustained communication that results in “us vs. them”; the sense of belonging that makes people take sides.
This is where factors like the name of the program and tiers come into the picture. In the best cases, in-group bias is present before any formal loyalty program as such. People love your product and are zealous about it.
A good loyalty program will amplify these feelings as a matter of status.
This is the reason we see programs like ‘Elite’, ‘Global Platina’ etc.
Lucky Loyalty Effect
The more someone is invested with a brand, the luckier they feel.
Loyal customers who have invested high amounts of efforts with a firm feel luckier and are likely to respond to randomly determined marketing activities.
People designing loyalty programs can use this to further engage their loyal customers. Lucky dips, lotteries, free desserts, and scratch cards are all tapping into this psychology.
People on top tiers cling to this luckier-and-more-deserved than thou feeling to justify their involvement with the brand.
The Lucky Loyalty Effect — The phenomenon of feeling luckier because we have invested more blows my mind. I had always wondered why people buying lotteries kept buying them over the years, in spite of not winning. This explains.
Which one is your favourite?