Consumer spending is a vital indicator of the health and growth of any economy. However, in recent years, consumer spending has been significantly impacted by various factors, such as inflation, unemployment, and geo-political concerns.

In fact, more than half of UK consumers have cut back on discretionary spending since the start of the year, according to research from KPMG. These challenges have made it more important than ever for businesses to understand consumer psychology and how to increase loyalty and spending among their customers.

Loyalty and rewards programmes have become one of the most effective ways to tap into the basic human motivations that drive consumer behaviour. By offering incentives and benefits to customers who repeatedly purchase from a brand, loyalty programmes create a win-win scenario for both consumers and businesses. Consumers get more value for their money, while businesses get more loyal customers, more data, and more revenue.

But how exactly do loyalty programmes work? What are the psychological principles behind them? And, how can businesses leverage them to shape spending, especially during challenging economic times?

The mindset behind loyalty programmes

Loyalty, defined as faithfulness or devotion, holds huge significance in the business and marketing world. It refers to the customer’s choice to consistently buy from a brand over its competitors, even when there are other options available. Loyalty is everything to businesses. It is a powerful force that can generate repeat purchases, referrals, and respect for a brand.

Brands lean into this principle of loyalty by providing consumers with incentives to spend more with a particular brand. The “give me your business, you get something back” model fosters an emotional connection and makes customers feel valued. Loyalty programmes create a sense of reciprocity and gratitude among customers, creating positive brand association. They also create a sense of belonging and identity, transforming customers into a community or a club that shares their values and preferences.

There are several main psychological principles that drive loyalty programmes:

1. The gratification of collecting and gathering

Humans have an innate inclination to collect and accumulate things, rooted in our evolutionary history when gathering resources was essential for survival and reproduction. Collecting and gathering also give us a sense of accomplishment, satisfaction, and progress. Loyalty points tap into this instinct by offering tangible reward for purchases.

People may not be millionaires in their real lives, but they certainly can be “points millionaires”. Customers feel motivated to accumulate points and begin to associate the brand with positive feelings and experiences.

2. The power of personalisation

Personalisation is the process of tailoring products or services to suit the individual needs and preferences of customers. Personalisation enhances customer satisfaction, loyalty, and spending by making customers feel valued, understood, and special.

By leveraging data analytics and customer feedback, loyalty programmes can also segment customers and offer rewards that match each customer’s interests, needs, and goals.

3. Loss aversion

Ever heard of FOMO? Well, loss aversion is a concept based on the fear of missing out. It’s a behavioural tendency where individuals are more sensitive to potential losses than they are to potential gains of the same value. For instance, if someone is given the choice between receiving £100 or avoiding losing £100, most people will choose to avoid the loss, even though the outcome is financially equivalent. This aversion to loss shapes consumer behaviour. In other words, people feel more pain from losing something than pleasure from gaining something.

Loss aversion shapes consumer behaviour by creating a sense of urgency and scarcity among customers. Loyalty programmes often use loss aversion by creating deadlines or expiration dates for redeeming points or rewards. Customers feel compelled to spend their points or rewards before they lose them, driving spending. Loyalty programmes can also use loss aversion by creating tiers or levels that require customers to maintain a certain amount of spending or activity to keep their status or benefits. Customers feel motivated to stay loyal to the brand or risk losing their privileges or perks.

4. Points magnification

Perception of value is crucial. Points-based loyalty programs are more effective because points disguise the true value collected in cash, by magnifying the real value earned.

For example, if a company offers you £2 for answering a survey, the response rate can be low. However, if they pay 100 points (equaling £1) then the response rates will be significantly higher. This is because, as humans, we perceive 100 points far more valuable than £2.

Magnifying value through a special currency of points can feel far more valuable than plain cash and is key to attracting customers.

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How does this shape spending?

By understanding and applying these psychological principles, loyalty programmes can shape spending in several ways:

• Attract more shoppers and reduce churn – By offering incentives and benefits that differentiate the brand from its competitors, brands will not only appeal to more customers but retain their current customer bases who are already invested in the brand.
• Increase share of wallet – By offering rewards, customers become less price sensitive. This is because customers perceive the value of the brand as higher than its price due to the added value they receive from the rewards. As a result, customers are also more likely to make bigger purchases than they would have normally because of the rewards they can earn or redeem – thereby, increasing spending.
• Generate more data – Data is everything to businesses. It helps them make better decisions and save costs. By tracking and analysing customer behaviour, preferences, and feedback, businesses can improve their products, services, marketing, and customer service. Businesses can also use data to personalise their offers and rewards to each customer, increasing their relevance and effectiveness.

Connecting brands with shoppers that have proven “loyalty DNA” is key to any loyalty scheme. Championing loyalty will be key to success for any brand amid challenging economic times. Helping businesses to increase their customer base, loyalty, and revenue by offering them access to a pool of loyal shoppers who are looking for ways to use their points, is really important.

Loyalty during challenging economic times

Loyalty programs prove effective not just in stable economies, but shine even brighter during tough times. Economic downturns witness reduced consumer spending, yet customer psychology remains unchanged, craving appreciation and rewards from brands. Loyalty schemes provide value, identity, and a sense of accomplishment even amidst difficult times. In fact, small rewards become more cherished, enhancing customer satisfaction.

Still, businesses must adapt their loyalty programmes by offering flexible rewards and fostering emotional bonds. During the pandemic, we saw travel loyalty programmes adapt by allowing point redemption for diverse purposes and extending reward validity. This resilience not only maintained but increased customer loyalty and spending, showcasing their crucial role in surviving and thriving during crises.

The Future of Loyalty

The future of loyalty looks promising for both businesses and consumers. Loyalty programmes are expected to continue growing in popularity and diversity in the business, aviation and retail landscape, as more brands realise the benefits of offering rewards and incentives to their customers. As such, loyalty programmes are becoming part of a brand’s core offering, and therefore facing more competition from other brands that offer similar or better rewards and benefits.

To stay ahead of the competition and meet the evolving needs and expectations of customers, loyalty programmes will need to leverage technology to enhance their offerings and experiences. Technology can boost current loyalty programmes, offering more personalised, convenient, and engaging rewards to customers. For instance, AI can help loyalty programmes collect and analyse more data that can help them improve their products, services, marketing, and customer service. By looking to MarPay™ solutions that connect loyalty programmes with wider brands, loyalty programme members gain more flexibility, convenience, and value for their loyalty points. We’re likely to see more brands invest in these technologies, particularly amid a trickier economic climate.

Ultimately, well-designed loyalty programmes make spending a win-win by rewarding customers for their business. By tapping into basic human motivations around collecting, progress and value, these programmes positively influence consumer behaviour. Loyalty programmes will only grow in importance as both companies and customers benefit from the value exchange.

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