A guide to using behavioural economics to generate customer loyalty

With consumer behaviour constantly evolving, so too must the loyalty market and the study of behaviour. When we think about shifts in customer behaviour, we think about consumerism and the cheap and cheerful mentality that China introduced in the 1980’s by mass manufacturing items at a lower cost and a lower quality. 

We also think about historic staple brands like Toys ”R” Us, Woolworths, Blockbuster and Debenhams who fell victim to the behaviour changes by not shifting their business model in time to keep up with the changing trends. 

So how do companies keep up with the ever-shifting behaviour trends and how can they keep consumers loyal when cheap and disposable is so deeply ingrained in consumer mentality and perceived as greater value above all else? 

In the 2010’s, brands started to invest heavily in loyalty and applying behavioural economic principles to create a brand conscious audience. Nike Jordan’s sell out in minutes. Starbucks sold out of their branded coffee cups in hours. Consumers are known to even go so far as to sleep outside of Apple stores to get the latest technology. 

All of these brands have ingrained themselves as the elite; "a must have"; a social status symbol. They rely on social media and the consumer themselves to make the brand more valuable and more desired.


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The 10 Principles of Behavioural Economics

The Say-Do Principle

What a user says motivates them vs what actually does motive them is very different. Think about how to use experiences rather than vouchers.

Securing Market Share at the top of the Loyalty Ladder
The Fairness Principle

People are influenced by a sense of fairness. If something is perceived as unfair or unequal in regards to a reward, they won’t want to take part.

Idiosyncratic Fit

When people perceive that a programme is tailored to them, they are more engaged, more motivated and more satisfied.

Time Principle

Immediacy and the value of time play an important part in how engaged a person is going to be.

Anchoring Bias

Buyers take in information subconsciously and use it to determine the value of something.

Goal Gradient Theory

As users get closer to the end target, their behaviour changes. The closer they get, the quicker they act.

The Loss Principle

This is something we are all familiar with in todays world. People are motivated by the fear of potentially missing out. #fomo.

Choice Architecture

People make decisions based on the layout, sequence and way in which choices are presented to them. Your environment shapes your choice.

Decoy Principle

When you present a list of options with a(n) asymmetrical decoy(s) to drive the person to select the option you would prefer.

Illusionary Goal Progress

It gives people a perceived head start towards their goal which motivates them to act quicker.

How do brands utilise the 10 principles to encourage loyalty

Loyalty is ultimately gained when a consumer feels that the products are costed fairly, they feel positive by engaging with a brand, and, if they have a membership, they feel that they are gaining something extra by participating.

Amazon, Tesco and Next, for example, all offer rewards to consumers that are part of a loyalty programme. In some cases, such as Amazon and Next, customers have to pay or spend a certain amount in order to gain access to those VIP benefits. The benefits that they receive though, far outweigh the cost that is needed to participate. The cost also comes with no indulgence guilt.

Big brands also tailor their programmes to have an idiosyncratic fit to the individual consumer. Amazon looks at customers viewing behaviour and suggests similar items that they may be interested in. Spotify creates personalised playlists. Next makes customers a VIP for spending X amount a year.

If the customer feels like the programme or brand is tailored to them and they get a distinct advance by participating, then they are more engaged, motivated and satisfied.

Another key factor to consider with a loyalty programme is time principles. These principles state that when running a loyalty programme, immediate low cost rewards are better received than less frequent, but higher value rewards. For example: if a brand offered a consumer an immediate £50 to complete 10 surveys that day or £100 in a year to complete 1 survey every three months, most consumers would elect for the more time consuming task for the immediate reward.

Within that, you must be mindful that the task and the reward are either balanced or that the reward is perceived to be worth more than the time required to earn it. If you offered a consumer £10 to complete 10 surveys that take 10 minutes each, most consumers would decline the £10, or even £20, as £20 is not worth an hour of their time. 

If, however you offered a free main course and dessert at a restaurant (e.g. Pizza Express), which would still be a reward of £20, the consumer would be more likely to engage and complete the survey as they would perceive the value to be far higher than £20. This also ties into hedonistic rewards and consumers valuing experiences/ merchandise over money or cash equivalents. 

Brands also greatly utilise choice architecture. For example, if they have excess stock of a cheap item (e.g. Pringles), they would put that item at the front of the store and by the tills, or if it were an online store, they would put it on their homepage advertising the sale – even if that sale is only 50p off. 

Choice architecture states that consumers make decisions based on the layout, sequence and the way in which choices are presented to them. Your environment shapes your choice. This principle is best utilised for quick decision making where there is no feeling of financial loss or a potential loss of control.

Putting It into Action

If your business is spending increasingly more on consumer acquisition, and not retaining a good proportion of your existing customer base, it could be time to ask yourself whether your business has adapted over the past few years to keep up with customer behaviour changes.

If the answer is no, then you may need to revaluate your existing loyalty programme so that it incorporates some of those key behavioural economic principles. If you haven’t invested in a loyalty programme, well, there is no better time than today to start those conversations!

About The Author - Jessica Boyce

Jessica has a passion for behavioural economics and loves working with clients to find ways of making small tweaks that have big impacts on programmes.

Connect with Jess on LinkedIn

About The Author - Melanie Parker

Stream’s co-founder, Melanie, became the first British woman to become accredited with the CLMP from The Loyalty Academy. Passionate about all things loyalty, Melanie cuts through the technical jargon and gets to the real business issue. Melanie loves to develop engaging digital solutions that appear simple whilst creating long lasting partnerships that add value to all.

View Melanie Parker's Profile

Connect with Melanie on LinkedIn


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