Customer Loyalty Schemes: How to Turn Psychological Principles into a Successful Strategy

customer loyalty

In an age when retailers are hiring ‘customer experience directors’ instead of ‘customer service directors’, it’s clear that retailers are focusing more on the bigger picture.

And it’s that all-important customer experience that drives loyalty, and is key to increasing profits. For instance, 70% of companies say it’s cheaper to retain a customer than to acquire a new one. Obviously, offering a great shopping experience, customer service and the right products is essential to increasing loyalty – but loyalty schemes can also play a key role.

Now, you might be thinking: virtually every retailer has some kind of loyalty card and, often, they don’t lead to genuine loyalty. Yes, that’s true – and, in fact, many cards are shoved in a wallet, never to see the light of day again. That’s why, to design a strategy that will really work, it’s important to tap into the psychology of the buyer. Here, we explain five psychological principles and how they can be utilised when designing customer loyalty schemes.


Reciprocity
The concept of reciprocity is simple: if someone does something for you, it’s natural to want to do something for them in return. You may think that most shoppers would see through a blatant attempt to win favour, but research shows otherwise. Have you ever received mints or chocolates with your bill in a restaurant? If yes, you’ve probably been influenced by reciprocity when paying your tip. According to Cialdini, when diners receive a bill along with one mint, the tip increases by an average of 3.3%. And, if two mints arrive with the bill, the tip jumps up by 20%.

How to apply this to your loyalty scheme:

  • Offer small rewards to customers just for joining your loyalty scheme – for instance, free points when you join, or a small gift
  • From this, you can then encourage repeat customers by increasing the value of the rewards as customers spend more money


Social Proof

Social proof is becoming an increasingly talked-about psychological principle that affects everything from website design to advertising – and you can see its power on social media, a platform that’s ‘social proof’ in action. Social proof is the “me too” effect, where people want to adopt the theories, beliefs or actions of other people they trust.

How to apply this to your loyalty scheme:

  • Promote your loyalty scheme with real stories – for instance, include customers’ stories of what they were able to achieve with their loyalty points, such as saving up for a bigger purchase
  • Include games and exclusive competitions in your loyalty schemes, which can be shared on social media
  • Geographic targeting – offer rewards that are relevant to the customer location, and show how these perks are popular with shoppers in this area


Loss Aversion
It doesn’t matter what it is: if we have something, we do not want to lose it.  Kahneman studied this concept by giving people mugs, chocolate or nothing. If they were given an object, they could choose to trade their object; if they were given nothing, they could choose one of the two items. Whereas roughly half of the participants who started with nothing chose mugs, 86% of participants who were given mugs stuck with that item instead of swapping for chocolate.

How to apply this to your loyalty scheme:

  • Design your loyalty scheme to emphasise what customers have already gained, or what they could have gained if they had been using their loyalty card
  • Encourage shoppers to claim their points to avoid losing out
  • If you have a VIP card that you want to encourage more customers to upgrade to, offer a limited trial of the service, which can be removed if a customer doesn’t upgrade within a certain amount of time

Anchoring
Anchoring describes how people tend to base decisions on the first piece of information they receive. The most common use of this theory in retail is the sale, where you’ll often see an item’s original price displayed alongside its sale price. If a shopper sees that a dress is £60, they might feel this is expensive – but, if the see that this £60 dress used to be £120, it suddenly seems like a bargain.

How to apply this to your loyalty scheme:

  • If you offer a loyalty card that gives users discounts, it’s a good idea to show customers just how much they could save with a loyalty card
  • If a customer already has points on their card, you could display website prices showing their loyalty points reduction (if it’s a significant amount)

Scarcity
Scarcity is another common psychological principle that is already widely used, particularly by airlines and hotel booking sites. Messages like ‘only three tickets left at this price’ or ‘only one room left’ can get browsers clicking ‘book’ more quickly than they otherwise would. In a study by Worchel, Lee and Adewole, the researchers found evidence that scarcity can have a huge effect on people’s perceptions. Participants were ask to rate some chocolate chip cookies – some were given cookies from a jar of 10 cookies, whereas others were given cookies from a jar with only two cookies. Even though the cookies were exactly the same, the cookies from the two-cookie jar were rated twice as highly as those from the 10-cookie jar.

How to apply this to your loyalty scheme:

  • Offer customers in your loyalty scheme exclusive rewards, such as extra discounts on products that will soon sell out, or by giving them the first chance to buy products expected to sell out quickly
  • Beyond offering your own products as rewards, it’s often very beneficial to partner with another business when offering loyalty rewards – you can then pass on exclusive offers from that business, which are available for a limited time only

To truly understand your customers, you need to understand how their minds work. A cleverly designed loyalty scheme can help you to influence buying behaviour – but also help you to create a better, more rewarding experience. Find out how we can help to support your customer loyalty scheme on our loyalty page.

Are there any psychological principles that surprise you? Or any loyalty scheme strategies that you’ve found to be effective? Share your thoughts below.

Connexions 2016 – The future is now

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The first day of the LS Retail Conference ConneXions 2016 has flown by and it sure is an exciting place to be. During the opening address by Carsten Wulff, Regional Director for Europe, we heard that the future is bright, the future is now, the future is NAV. Well, this is very true of the Machine Learning presentation and demo given this morning by Luis Cabrera, Senior Program Manager from the Microsoft Azure team.

During Luis’s presentation, we heard how through Microsoft Cognitive Services you could use intelligence to augment user experiences, customise response and even drive different actions and outcomes with your customers. This was demonstrated through solutions that can see, hear, speak and interpret. Through Microsoft Cognitive Services, you can build apps with powerful algorithms and as Luis put it “Its not rocket science, you just need a few lines of code”

Microsoft Cognitive Services expands on Microsoft’s evolving portfolio of machine learning APIs and enables developers to easily add intelligent features – such as emotion and video detection; facial, speech and vision recognition; and speech and language understanding – into their applications.

We saw today the power of the Microsoft Face API. Face API is a cloud-based API that provides the most advanced algorithms for face detection and recognition. During the demo, simply through standing in front of a camera, the API was able to detect and project an image and then suggest attributes to the persons face from their pose, gender and age.

In general, face recognition provides the functionalities of automatically identifying or verifying a person from a selection of detected faces. The Face API provides four recognition functionalities: face verification, similar face searching, automatic face grouping and person identification. Face recognition is widely used in security systems, celebrity recognition and photo tagging applications. During the demonstration, Luis used 2 guests from the audience and it was fantastically exciting to see.

13112849_1073614519368986_1544318347045915529_o“We want to build intelligence that augments human abilities and experiences. Ultimately it is not going to be about man versus machine. It is going to be about man with machines,” Satya Nadella, Microsoft CEO explained earlier in April at Microsoft Build 2016.

I’m personally excited about where this will go to next. During the coffee break it was a hot topic among our customers.

How will this all fit in to retail? K3 Retail have some ideas but we’d love to hear your thoughts. Natalie Bruins.

 

The Most Important Retail Innovation is in Your Pocket Right Now

consumer insights

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