The Influence of Loyalty Programs on Customer Behaviour

Covid-19 drastically changed consumer behavior and, as a result, forced many businesses to review their current models. In simplest terms, the pandemic caused brands to become innovators and customers to be early adopters.

From embracing online shopping to re-evaluating priorities and products used, customers have demonstrated they can be flexible but just as demanding. On the brand side -technology is evolving, and the ambition of new ideas means global organizations have the means to respond to the changes led by the customer.

The most recent customer sentiment research by McKinsey reveals that 35% of U.S. customers have tried a new brand since the crisis began. In comparison, 77% have also experimented with new shopping behavior, including new channels, stores, and brands.

Loyalty programs' impact on customer behavior

The importance of loyalty in any business domain is of utmost importance these days. Dedication or loyalty towards the brand plays a pivotal role. The concept of loyalty, which has an ultimate or direct impact on customer buying behavior, is also known as behavioral loyalty.

Behavioral loyalty can be defined as “an ongoing propensity to buy the brand, usually as one of several,” state Ehrenberg and Scriven. This behavior is essential to businesses as it shows that people regularly buy from them. While it remains an essential factor that needs to be studied, behavioral loyalty alone cannot be used to measure someone's loyalty to a brand.

According to business.com, repeat customers spend 67% more than new customers via repeat purchases, larger cart sizes, and frequent upsells. Have you ever wondered why?

How can loyalty programs influence the behavior of customers when building a loyal customer base?A loyalty program encourages customers to purchase products from, engage with, or use the services of a specific brand. Customers are recognized and rewarded across different channels based on money spent or some other interaction with your brand. For these customers, interacting with you is much more important than any one purchase. Therefore, loyalty programs work to build emotional bonds and nurture relationships. A loyalty program focuses on long-term goals—build a team of advocates, boost the number of monthly referrals and much more!.

Even though factors such as reward quality and program simplicity significantly impact a loyalty program's success, many psychological phenomena and analytical biases control a customer's willingness to participate.

Let's look at some unique ways loyalty programs can impact customer behavior.

1. Schedule rewards regularly to maintain motivation

Customers are most effectively influenced by a “continuous” reinforcement schedule that includes loyalty rewards. Instead of receiving rewards at regular intervals, the user will receive them whenever they complete the desired action (i.e., every month or every quarter). For instance, if customers are rewarded for every referral that results in a new customer, they are more likely to continue making referrals.

Utilizing strategies such as reward redemption limits and expiration dates can instill a sense of urgency to motivate customers to act when they become aware of the possibility of loss.

2. Offer rewards that can be obtained

If a reward goal feels unattainable, motivation to achieve it will be low. Data from HelloWorld reveals that over half (53%) of surveyed consumers say it takes too long to receive a reward when participating in a loyalty program. This is also why customers lose interest in loyalty programs.

Offering smaller reward goals at different points in a customer's journey is a much more appealing idea than telling them they have to spend $200 before they get a 5% discount on their purchase. Send notifications to customers to remind them of their reward balances or to tell them what they need to do to move up to the next reward level. Make it easy to understand using progress bars, scorecards, and other visual tools. For example, Sephora's Beauty Insider rewards program is wildly popular. The program boasts more than 17 million loyal members, and members contribute to 80% of Sephora's annual sales. Customers earn rewards for each purchase based on a traditional point system, and the innovative part is members can choose how to use their reward points.

3. Offer a welcome bonus and understand your new customers

You do not need to offer a significant bonus to impact and increase loyalty programs positively. Consider offering a small welcome bonus to express gratitude. Depending on the scope of your goals, you may be able to create a more structured loyalty program to reward customers on an ongoing basis.

Ensure that your program's rules and guidelines are clear and that you promote it online and in-store. The Starbucks Rewards program is one of the world's most prominent customer loyalty programs.

It is a commonplace for brands to develop mobile apps and manage loyalty programs. When Starbucks first launched Starbucks Rewards on its mobile app, the concept was novel. To collect points (or stars for Starbucks), customers need to buy coffee with the mobile app. So, how does that help Starbucks?

Starbucks achieves a gold mine of customer behavior and preferences data by having many customers transact from the app. Collected customer data include go-to drinks,
seasonal favorites, frequently visited locations, and much more.

4. Social status & exclusivity matters

Participation in a loyalty program is also motivated by a desire to enhance one's social standing.
This is why VIP programs are so effective: we enjoy surpassing our peers and gaining access to better perks by achieving a higher reward tier.

Treating your key customers differently creates a brand-unique elite status and instills a sense of accomplishment in those who reach the top. The importance of a loyalty program lies in its ability to understand customer behavior. Knowing how a customer reacts to different scenarios can help brands present their loyalty offerings in a way that maximizes conversions.

Final thoughts

As a competitive strategy, a loyalty program must meet specific requirements. It should always be aligned with a brand, and it must be set in a manner that pleases the needs and desires of customers, as this is a fundamental aspect of customer behavior.
Understanding your customers' psychology & analytical biases helps you influence them to your advantage while still giving them something they value and drive profitability.

One of the most significant advantages of being considered a loyal brand is that customers will always stick with your brand during economic downturns.