Loyalty programs are on the rise.
Loyalty programs are one of the key strategies that most companies use. It is a way for them to retain customers and some of the market shares in the industry, by providing discounts or exclusive offers to the clients to remain shopping at the brand. Why are these customers hooked into the brand immediately after they receive the programs? Is there any magic behind it? The answer is no! This trend uses some of the most fundamental concepts in behavioral economics, involving certain psychological theories that influence the decision-making of consumers. (Black, 2020)
Source: https://paycore.com/6-ways-to-apply-loyalty-programs-to-payments/
No big deal! It is just psychological science.
One of the main rationales behind these programs is the endowment effect. This is when humans place more value on things they possess, rather than on something that they do not have. In this case, once customers sign up for a benefits scheme, they will have a personal account and start stacking points and rewards, just like in a video game. These rewards can be converted into discounts or vouchers on special occasions. This gives them the feeling of “owning” the brand and hooks them into purchasing repeatedly. At one point, these loyal members will accumulate points more than their monetary equivalent. And of course, this will make the revenues of shops skyrocket. (The Decision Lab, n.d.)
The second psychological phenomenon that explains the reason behind consumers committing to a loyalty program is social proof. This is when individuals copy the actions of others just because other people are also doing the same thing. Specifically, if a person knows that their family, friends, or relatives are all using loyalty programs of a supermarket, say Tesco, then they are compelled to take the same action and sign up for the Tesco discount offers. Most of the time these people just follow the crowd to make their own decision, without evaluating the full pros and cons of the situation. They make decisions based on herd instinct and use rules of thumb, resulting in not maximizing their personal utility. (Poston, 2024)
Source: https://trustpulse.com/2024/01/07/examples-of-social-proof/
How these programs affect consumer behavior
There are many ways that these programs offered by brands can impact consumers.
Firstly, it depends on how the reward system is organized. Supermarkets have strategies that gamify the schemes they offer to customers. For instance, the use of point accumulation and tiered rewards are pretty favorable in attracting additional buying. This design of points uses the concept called mental accounting. This way clients registering for the scheme can feel a sense of “progress” in their membership journey. Members do not want to lose the points they earned, and the only way to keep this is to keep purchasing to protect them. (Hure, 2024)
Secondly, a tiered reward system is also a common tactic that most brands do. This is when loyal memberships are divided into different rankings (bronze, silver, gold reward system), encouraging clients to “work hard” to climb up the ladder. By “working hard”, customers have to buy extra items, spending a considerable amount of money just to maintain those tiers and rewards. This drives consumption but brands should be aware that if leveling up to the next tier is difficult, consumers will be demotivated and retreat from the scheme, leading to worse outcomes. So it is the owners’ job to balance between company’s profitability and create a loyalty scheme that entices consumption and appeals to clients. (Hure, 2024)
Finally
Benefits schemes will continue to be a strategy that brands predominantly use in the future to distinguish themselves and create a competitive edge. Undoubtedly, firms will gain more market shares if the membership they provide satisfies the demand of customers. Consumers will benefit from this the most, as they will have a wide selection of brands that give them the best services and schemes, increasing their purchasing experience and quality with a reduced price owing to the competition in the market.
References
Black, H. (2020). 5 Effective Customer Loyalty Programs and How They Work. [online] Zendesk. Available at: https://www.zendesk.com/blog/loyalty-rewards/ [Accessed 10 Oct. 2024].
Hure, D. (2024). Loyalty Programs: Impact on Customer Purchase Behavior – Reward the WorldTM. [online] Reward the WorldTM. Available at: https://rewardtheworld.net/loyalty-programs-impact-on-customer-purchase-behavior/ [Accessed 16 Oct. 2024].
Poston, L. (2024). Council Post: Decoding Social Proof in Consumer Psychology. Forbes. [online] 12 Aug. Available at: https://www.forbes.com/councils/forbescommunicationscouncil/2024/05/09/decoding-social-proof-in-consumer-psychology/ [Accessed 14 Oct. 2024].
The Decision Lab. (n.d.). The Endowment Effect. [online] Available at: https://thedecisionlab.com/reference-guide/economics/the-endowment-effect [Accessed 14 Oct. 2024].