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Loyalty Programs Are Driven by Psychology. Here’s Why.

Updated: Sep 9, 2022

“Go get a packet of bread and you can buy whatever you like with the remaining ₹2.”

I remember this beautiful memory from my teenage days. Every time my mom wanted a bread packet, she’d hand me ₹20 and ask to get one from the shopping complex.

The first time she reached out, I was hesitant but since I always wanted a reason to ride my bicycle, I agreed.

When I came back, I handed both the packet and remaining ₹2 change over to my mom and said, “I’m not going from next time. It’s such a task!”.

A few days later, mom came back to me with the same request but a new strategy. This time, she said I could keep the ₹2 change to myself and that felt rewarding.

At that moment, my mom gave me a sense of encouragement.

Thereafter, I started to feel excited about buying bread as I’d get to keep the ₹2, buy a candy or save it up to be able to buy something valuable for myself.

This is a nostalgic moment I was taken to when I started exploring how psychology drives loyalty programs.

I thought, “Oh wow! My mom and I’m sure most parents knew how to tap into getting something done repeatedly by offering a reward.”

As I went on to dive deeper into how loyalty programs are driven by psychology, I was further fascinated to see that there are 5 psychological principles behind loyalty programs' effectiveness.

Fascinated because as someone who’d worked on the marketing of a mental health startup before, I had a personal inclination towards finding the psychology behind everything.

So I kid you not but I got genuinely invested into finding out how psychology drives customer loyalty and here's what I learned:

1. Positive Reinforcement

You must have heard of giving dogs a treat after good behaviour. This is nothing but positive reinforcement - you reward a behaviour with a positive outcome or praise.

The positive reinforcement principle says that we are more likely to repeat behaviours that have been rewarded in the past.

This same principle applies to loyalty programs - when customers are rewarded for their loyalty, they feel good about the company and want to continue being a part of it.

Starbucks - the world's largest coffeehouse chain used a similar approach to build their loyalty program. As of 2022's second quarter, active membership of Starbucks' loyalty program jumped to 26.7 million.

The more its loyalty program members spend, the more stars they get. This increases the likelihood of the members spending in order to earn stars and redeem rewards.

Members also get birthday rewards that are redeemable for free food or beverage. In addition, the program's participants earn 25 stars and 10 cents discount off their drink if they return a reusable cup.

Source: Starbucks Loyalty Program

2. Goal Gradient Effect

During 2020 and 2021, there were many who gained lockdown weight and I was one of them too. When this started to cause health issues, I decided to lose 5 kgs of weight.

I started eating healthy, taking stairs instead of elevators, going for a run and shed 3 kgs of weight. Upon seeing this, I made a promise to continue this healthy lifestyle and lost 2 more kgs.

Know why I could do it? With dedication, yes but also because my behaviour was fuelled by the goal gradient effect.

The Goal Gradient Effect states that as people get closer to a reward, they speed up their behaviour to get to their goal faster. In my case, the reward was feeling fit.

Now if we apply this to loyalty programs, we’ll see how this can lead to user motivation and thereby retention.

Setting incremental rewards will help customers feel more rewarded and encouraged to return. In other words, once customers achieve their first reward, they will be more motivated to earn their next reward.

This is also what Starbucks does. The app uses Goal Gradient language such as “40 stars until next reward” to drive customers to buy more.

Source: Starbucks Rewards

3. Endowed Progress Effect

During college, my friend and I were addicted to hidden mystery games. Once while we were playing it on our iPad during a boring lecture, I remember having a jigsaw puzzle as part of it where 2 pieces were already unlocked and we had to find the rest.

Being able to see those two pieces gave us a kickstart to solve the puzzle and that's the Endowed Progress Effect.

It's the notion that people are more likely to finish a task when given an artificial head start. If you provide progress toward doing something, one is more inspired to finish it.

This is reflected in a classic research wherein two researchers gave loyalty cards for a car wash. They handed out two types of cards:

Card 1: Required 8 purchases for a free car wash. Meaning, customers had to get 8 stamps to redeem the reward.

Card 2: Required 10 purchases/stamps but with two of the spaces on the card already stamped.

After 9 months, 34% of the people with 2 free stamps had redeemed their cards versus 19% percent who had cards without stamps.

Source: Interactive Digital

4. Loss Aversion

If you're like most people, you hate losing more than you like winning. This is often the case when customers have invested in a product or service - they would rather avoid losing what they've already earned than acquire something new.

Loss aversion is a psychological phenomenon in which people prefer avoiding losses rather than acquiring gains.

For instance, if you're running a loyalty program where you offer rewards that can be used only by members, then there's a good chance that your customers will feel loss aversion and take steps to ensure they don't lose their points.

Starbucks does this splendidly by offering member-only benefits.

5. Escalation of Commitment

I love using apps or playing games that have personalisation. In 2012, I was deeply indulged into the life simulation game - The Sims. The fact I could customise my character, home and make them do things I wanted fascinated me.

I’d simply login to the app to make sure my character took shower, cooked and went to the office.

This was because I personified the app which turns out to be a result of a psychological phenomenon - Escalation of commitment. Under this, you are more likely to feel attached to something you put your time/money in.

The same concept can be leveraged for loyalty programs too.

When you start a loyalty program and offer rewards to users that reflect personalisation, they'll feel an immediate sense of ownership and want to continue using it.

GPay’s Indi Home game of building houses and earning assured rewards is a perfect example of building loyalty using escalation of commitment.

The app provides a sense of belonging by allowing you to make transactions, earning energy and building a house.

Wrap Up

Loyalty programs are powerful tools for building customer loyalty, but they're not easy to get right. With Flyy's plug and play SDK, it's easy to get started with a loyalty program gamification for your users. If you'd like to learn more, schedule a demo today!



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