Here are 5 ways to improve loyalty programs, according to science

There’s no denying that loyalty programs are effective: 95% of consumers with retail subscriptions say they will purchase more products from those brands.

But what is the science of customer loyalty? What is the psychology behind loyalty programs? And what is it about rewards programs that appeal to us?

Understanding the science behind loyalty programs will help you maximise the results of your own loyalty program.

Why are loyalty programs effective?

Loyalty programs are highly effective in driving customer retention by rewarding repeat customers with exclusive offers and personalised benefits. These programs foster a sense of appreciation and create a strong bond between the brand and its loyal customers.

By providing incentives such as coupons, birthday gift cards, and personalised treatment, loyalty programs encourage customers to continue choosing the brand over competitors.

Satisfied and loyal customers often become advocates, enthusiastically sharing the program's special offers with their friends and family, leading to an influx of new referrals and further expanding the brand's customer base.

Several studies analysed the financial impact of loyalty programs across industry sectors in multiple countries, concluding that loyalty programs have a positive impact on the financial performance of an organization.

One important lesson from these two studies is that the design and operation of loyalty programs determine their effectiveness.

So what are some of the ways to increase customer loyalty and roll out a successful loyalty program?

1. Reduce customer effort

One of the best ways to increase customer retention using loyalty programs is to reduce customer effort and make things easier for your users.

When we talk about customer effort, we mean the amount of effort that customers must exert to get an issue resolved, a request fulfilled or a question answered.

A Harvard Business School study found that reducing customer effort is the number one factor in creating customer loyalty.

A better customer experience helps to drive repeat behaviour, too, and habit is important in creating customer loyalty.

According to research, 94% of customers who experience a low-effort interaction buy again, while only 4% of customers with a high-effort experience do the same.

Some helpful tips on how to reduce customer effort: make your FAQ page accessible and helpful, anticipate your customers’ needs, and implement omnichannel customer service.

2. Create a social identity

According to social identity theory, people are more likely to remain loyal to an established in-group when they feel like they are part of that group.

Companies can help by creating or nurturing these channels, allowing customers to develop social bonds with each other, as well as the brand.

A clever way to achieve this is to incorporate status tiers into your loyalty programs, in an attempt to tap into the power of social identity theory. Many brands provide their VIP members with custom rewards and private store access to make them feel appreciated.

A recent study identified that simply labelling customers as members was sufficient to stimulate a higher level of sense of belonging and customer satisfaction. It was enough to influence the customers’ evaluations of the firm.

Airlines, hotels, and banks use this theory often to promote member loyalty and retention through tier benefits.

3. Implement gamification elements

Another smart way to increase customer loyalty is to implement gamification elements into your loyalty programs.

To engage users better, gamification applies game mechanics, elements, and principles to non-game contexts. The point is to inspire users to engage with the content, especially with tasks that are not enjoyable.

Some gamification mechanics used in loyalty programs are goals, ranks or levels, using communities to complete activities or achieve objectives, and tips, tricks and quizzes given to the user.

Gamification is all about motivation, the desire and willingness to do something. Dopamine, the chemical signal that travels from one neuron to another, fuels this feeling of drive and ambition. When you feel happy or satisfied, your body releases dopamine.

Gamification takes advantage of our motivations to enhance daily activities or specific tasks, tapping into the user’s intrinsic motivation while offering extrinsic motivation, such as rewards, points and badges.

4. Deliver unexpected rewards

Speaking of dopamine, unexpected rewards produce a huge rush of this chemical in the brain. If loyalty programs reward customers when they least expect it, brands can really make an impression.

According to research, dopamine neurons become active when we get a reward. Activating dopamine neurons in response to a certain behaviour mimics the effect of an unexpected reward, positively reinforcing that behaviour.

When we receive an unexpected or larger reward than expected, dopamine neurons become more active. The same neurons show depressed activity when we receive less reward than predicted.

You can increase customer engagement and purchase frequency by adding surprise and delight mechanisms to your retention strategy.

In addition to getting shoppers to repeat positive actions in hopes of receiving more benefits, this strategy will keep your business at the top of their minds.

5. Show customers you share their values

Did you know that 88% of customers said they expect brands to clearly state their values?

A key factor of successful loyalty programs is knowing how to communicate brand values loud and clear: brand loyalty is largely driven by shared values.

Like with their friends and families, customers expect brands to know what they value and understand them.

In fact, 66% of customers have stopped buying from companies whose values didn’t align with theirs.

Consumers no longer simply want a product that ticks all the right boxes, they want to know how the company contributes to society at large. They want their money to go towards supporting something they believe in. 

An important part of the shopping experience with a brand is sharing values with other like-minded customers.